[Senate Hearing 112-142]
[From the U.S. Government Printing Office]




                                                        S. Hrg. 112-142
 
    COMBINED HEARINGS HELD BY THE JOINT SELECT COMMITTEE ON DEFICIT 
                               REDUCTION

=======================================================================

                                HEARINGS

                               before the

                         JOINT SELECT COMMITTEE
                          ON DEFICIT REDUCTION
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               ----------                              

                      SEPTEMBER 13, SEPTEMBER 22,
                    OCTOBER 26, AND NOVEMBER 1, 2011

                               ----------                              


 Printed for the use of the Joint Select Committee on Deficit Reduction





                                                        S. Hrg. 112-142

    COMBINED HEARINGS HELD BY THE JOINT SELECT COMMITTEE ON DEFICIT 
                               REDUCTION

=======================================================================

                                HEARINGS

                               before the

                         JOINT SELECT COMMITTEE
                          ON DEFICIT REDUCTION
                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                      SEPTEMBER 13, SEPTEMBER 22,
                    OCTOBER 26, AND NOVEMBER 1, 2011

                               __________





 Printed for the use of the Joint Select Committee on Deficit Reduction




                  U.S. GOVERNMENT PRINTING OFFICE
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              JOINT SELECT COMMITTEE ON DEFICIT REDUCTION

                   JEB HENSARLING, Texas (R) Co-Chair

                 PATTY MURRAY, Washington (D) Co-Chair

XAVIER BECERRA, California (D)       JON KYL, Arizona (R)
FRED UPTON, Michigan (R)             MAX BAUCUS, Montana (D)
JAMES CLYBURN, South Carolina (D)    ROB PORTMAN, Ohio (R)
DAVE CAMP, Michigan (R)              JOHN KERRY, Massachusetts (D)
CHRIS VAN HOLLEN, Maryland (D)       PAT TOOMEY, Pennsylvania (R)

                      Mark Prater, Staff Director

                   Sarah Kuehl, Deputy Staff Director

                                  (ii)








                            C O N T E N T S

                              ----------                              

                           SEPTEMBER 13, 2011
     The History and Drivers of Our Nation's Debt and Its Threats 
                           Opening Statements

                                                                   Page
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman, 
  Joint Select Committee on Deficit Reduction....................     1
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
  chairman, Joint Select Committee on Deficit Reduction..........     2
Becerra, Xavier, a U.S. Representative from California...........     3
Kyl, Jon, a U.S. Senator from Arizona............................     4
Baucus, Max, a U.S. Senator from Montana.........................     5
Upton, Fred, a U.S. Representative from Michigan.................     6
Clyburn, James, a U.S. Representative from South Carolina........     6
Portman, Rob, a U.S. Senator from Ohio...........................     7
Kerry, John, a U.S. Senator from Massachusetts...................     9
Camp, Dave, a U.S. Representative from Michigan..................    10
Van Hollen, Chris, a U.S. Representative from Maryland...........    10
Toomey, Pat, a U.S. Senator from Pennsylvania....................    11

                                Witness

Elmendorf, Dr. Douglas W., Director of the Congressional Budget 
  Office.........................................................    12
                              ----------                              

                           SEPTEMBER 22, 2011
          Overview: Revenue Options and Reforming the Tax Code
                           Opening Statements

Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
  chairman, Joint Select Committee on Deficit Reduction..........    53
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman, 
  Joint Select Committee on Deficit Reduction....................    55

                                Witness

Barthold, Thomas A., Chief of Staff, Joint Committee on Taxation.    56
                              ----------                              

                            OCTOBER 26, 2011
       Overview: Discretionary Outlays, Security and Non-Security
                           Opening Statements

Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman, 
  Joint Select Committee on Deficit Reduction....................   117
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
  chairman, Joint Select Committee on Deficit Reduction..........   119

                                Witness

Elmendorf, Douglas, Ph.D., Director, Congressional Budget Office.   120
                              ----------                              

                            NOVEMBER 1, 2011
                  Overview of Previous Debt Proposals
                           Opening Statements

Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
  chairman, Joint Select Committee on Deficit Reduction..........   152
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman, 
  Joint Select Committee on Deficit Reduction....................   153

                               Witnesses

Bowles, Erskine, Co-Chair, National Commission on Fiscal 
  Responsibility and Reform......................................   154
Simpson, Hon. Alan, Co-Chair, National Commission on Fiscal 
  Responsibility and Reform......................................   156
Domenici, Hon. Pete, Co-Chair, Debt Reduction Task Force, 
  Bipartisan Policy Center.......................................   158
Rivlin, Dr. Alice, Co-Chair, Debt Reduction Task Force, 
  Bipartisan Policy Center.......................................   161

                              ----------                              

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Barthold, Thomas A.:
    Testimony....................................................    56
    Prepared statement...........................................   297
    Responses to questions from committee members................   383
Baucus, Max:
    Opening statement............................................     5
    Prepared statement...........................................   203
Becerra, Xavier:
    Opening statement............................................     3
    Prepared statement...........................................   204
Bowles, Erskine:
    Testimony....................................................   154
    Prepared joint statement.....................................   457
Camp, Dave:
    Opening statement............................................    10
Clyburn, James:
    Opening statement............................................     6
    Prepared statement...........................................   205
Domenici, Hon. Pete:
    Testimony....................................................   158
    Prepared joint statement.....................................   466
Elmendorf, Dr. Douglas W.:
    Testimony...................................................12, 120
    Prepared statement.........................................206, 417
    Responses to questions from committee members................   283
Hensarling, Hon. Jeb:
    Opening statement...................................2, 53, 119, 152
    Prepared statement...............................287, 412, 453, 501
Kerry, John:
    Opening statement............................................     9
    Prepared statement...........................................   288
Kyl, Jon:
    Opening statement............................................     4
Murray, Hon. Patty:
    Opening statement...................................1, 55, 117, 153
    Prepared statement...............................289, 414, 454, 510
Portman, Rob:
    Opening statement............................................     7
    Prepared statement...........................................   291
Rivlin, Dr. Alice:
    Testimony....................................................   161
    Prepared joint statement.....................................   466
    Responses to questions from committee members................   494
Simpson, Hon. Alan:
    Testimony....................................................   156
    Prepared joint statement.....................................   457
Toomey, Pat:
    Opening statement............................................    11
Upton, Fred:
    Opening statement............................................     6
    Prepared statement...........................................   293
    Slide titled: Score of PPACA: 2014-2023......................   512
Van Hollen:
    Opening statement............................................    10
    Prepared statement...........................................   295


      THE HISTORY AND DRIVERS OF OUR NATION'S DEBT AND ITS THREATS

                              ----------                              


                      TUESDAY, SEPTEMBER 13, 2011

                        United States Congress,    
                                 Joint Select Committee    
                                      on Deficit Reduction,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:33 a.m., in Room 
SH-216, Hart Senate Office Building, Hon. Patty Murray [co-
chairman of the committee] presiding.
    Present: Senator Murray, Representative Hensarling, Senator 
Baucus, Representative Becerra, Representative Camp, 
Representative Clyburn, Senator Kerry, Senator Kyl, Senator 
Portman, Senator Toomey, Representative Upton, and 
Representative Van Hollen.

  OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM 
  WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Chairman Murray. Good morning. This hearing of the Joint 
Select Committee on Deficit Reduction will come to order.
    As my co-chair, Representative Hensarling, mentioned at our 
meeting on Thursday, we have agreed to alternate chairing these 
hearings, with him chairing the hearings that are held on the 
House side, and I will be doing the ones here in the Senate.
    I want to recognize and thank all of our fellow committee 
members for being here today, as well as our witness, Dr. 
Elmendorf, for joining us today.
    And I want to thank all the members of the public who are 
here today as well. We appreciate your presence and ask that 
you help us maintain decorum by refraining from any displays of 
approval or disapproval during this hearing.
    Before I start, I do want to announce that the joint select 
committee's Web site is now up and running. Members of the 
public can go to http://www.deficitreduction.gov/, where they 
can provide us input and ideas to this committee and where all 
public hearings will be streamed live, starting today.
    Today, we are going to start off with brief opening 
statements from committee members--15 minutes for Democrats and 
15 minutes from the Republican side. We will then hear from Dr. 
Elmendorf. And following his testimony, we will have some time 
for questions and answers.
    The topic of today's hearing is ``The History and Drivers 
of Our Nation's Debt and Its Threats.'' I think this is a 
fitting opening for us for the difficult work this committee 
has ahead of us. We are tasked with tackling a problem that 
wasn't created overnight and that didn't come about just in the 
last few years.
    Our debt and deficit problems have a lengthy and complex 
history, and we will not be able to truly address them without 
a deep and honest understanding of the policies and 
circumstances that have led us to where we are today.
    The challenges that we face are real, and our task will not 
be easy. But I am confident we can get it done because we have 
done it before.
    Like a number of my fellow committee members, I was here 
back in the '90s, when we were facing serious deficits and a 
mounting public debt. I was proud to work with President 
Clinton and Republicans in Congress to balance the budget in a 
way that truly worked for the American people, a way that made 
smart cuts to Government spending that were desperately needed, 
included revenues, and continued to make the strong investments 
in healthcare, education, and infrastructure that helped lay 
down a strong foundation for economic growth.
    The balanced and bipartisan work we did not only balanced 
the budget and it not only helped set our country up to create 
millions of new jobs, but it also put us on track to completely 
pay down our debt by 2012, which was a great accomplishment.
    But as we all know, a lot has changed since then. For many 
reasons, our deficit and debt have exploded in the years since. 
Some of these reasons have to do with Government policies here 
at home, some with decisions made regarding our policies 
overseas, and others due to the financial and economic crisis 
that has devastated families and businesses here over the last 
few years.
    I am looking forward to hearing more about the scope and 
drivers of our deficit and debt from Dr. Elmendorf today. And I 
am confident the members of this committee can help bring our 
Nation together once again around a balanced and bipartisan 
path to fiscal health and economic growth.
    [The prepared statement of Chairman Murray appears in the 
appendix.]
    Chairman Murray. With that, I will call on my co-chair, Mr. 
Hensarling, for his opening statement.

OPENING STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE 
  FROM TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Co-Chair Hensarling. Thank you, Madam Co-Chair.
    The purpose of today's hearing is to really highlight the 
unsustainable nature of our Nation's debt. And I believe the 
term ``unsustainable,'' frankly, is understated.
    I certainly want to welcome Dr. Doug Elmendorf, head of the 
CBO, who, when I was a member of the Budget Committee, I have 
had an opportunity to work with, truly a professional in this 
town. Sir, I look forward to your testimony.
    In the last organizational meeting we had, I mentioned the 
work by Professors Carmen Reinhart and Kenneth Rogoff, ``This 
Time Is Different.'' Through their historical study of 
financial crisis, they indicated that letting debt rise above 
90 percent of GDP was, frankly, a recipe for bad things to 
happen to a nation.
    Well, this year, our Nation has raced past that tipping 
point. Our gross debt has now surpassed 100 percent of GDP. And 
I believe there are two crises in our Nation--not just the debt 
crisis, but the jobs crisis--and they are clearly connected. 
The explosive growth in our Nation's debt hampers our job 
creation today.
    Last week, I quoted a small business person from the 5th 
District of Texas on the subject. Today, I want to quote from a 
few more, names you may be more familiar with.
    Bernie Marcus, former chairman and CEO of Home Depot, which 
employs 255,000. ``If we continue this kind of policy, we are 
dead in the water. If we don't lower spending and if we don't 
deal with paying down the debt, we are going to have to raise 
taxes. Even brain dead economists understand that when you 
raise taxes, you cost jobs.''
    Mike Jackson, CEO, AutoNation, 19,000 employees. ``The best 
thing that this town could do to help this economic recovery 
become sustainable is to deal with the deficit and to see tax 
reform.''
    Jay Fishman, chairman and CEO of Travelers Insurance 
Company. ``What is really weighing on their minds is not 
knowing how the coming explosion in Federal debt is going to 
affect their borrowing costs, liquidity, cost of doing 
business, and prices.''
    Finally, 2 or 3 months ago, the U.S. Chamber came out with 
a survey, their small business survey, 83 percent of 
respondents said that America's debt and deficit have a 
negative impact on their business.
    So I would make the point, Madam Co-Chair, that a path to 
credible deficit reduction is a jobs program, and we should not 
be deterred in that mission. We have a spending-driven debt 
crisis. The deficit reduction will be a jobs plan.
    And I look forward again to hearing the comments of our 
colleagues as we go about this important work and of the 
testimony of Dr. Elmendorf. And I yield back.
    Thank you.
    [The prepared statement of Co-Chair Hensarling appears in 
the appendix.]
    Chairman Murray. We will now turn to our members, beginning 
with Representative Becerra.

           OPENING STATEMENT OF HON. XAVIER BECERRA, 
             A U.S. REPRESENTATIVE FROM CALIFORNIA

    Representative Becerra. I thank the two co-chairs and thank 
Dr. Elmendorf for being with us.
    The creation of this Joint Select Committee on Deficit 
Reduction is the direct result of legislative policies and 
economic recessions that have hit us over the last 10 years and 
that have caused the Congressional Budget Office's 10-year 
estimated $5.6 trillion surplus in 2001 to turn into a more 
than $6 trillion deficit that we see today. So to know where to 
go with the work that we have to do, you have to know from 
where we came.
    Today, we will hear about how we lost our way. What we will 
hear is that a select few in this country enjoyed the 
additional Government spending that occurred in those 10 years 
while the rest of Americans are being confronted with paying 
the tab.
    In January 2001, CBO's assessment in its yearly Budget and 
Economic Outlook report was this, ``The outlook for the Federal 
budget over the next decade continues to be bright. Assuming 
that current tax and spending policies are maintained, CBO 
projects that the mounting Federal revenues will continue to 
produce growing budget surpluses for the next 10 years.''
    But as we all know, current tax and spending policies were 
not maintained. Dr. Elmendorf, it is exactly these policies 
that induced the Federal deficit, which I want to explore in my 
questioning with you today.
    Decisions were made to extinguish a $5.6 trillion surplus. 
The individual and groups who received the most benefits should 
be willing and ready to ante up, to meet their patriotic duty 
to contribute revenues and necessary spending decisions to heal 
this country's long-term fiscal situation.
    We need to ask ourselves was it the senior citizen, the 
student, or the Wall Street banker who received the benefit of 
this spending binge? When we have our answer, we should ask the 
appropriate person or group to pay their fair share to right 
the wrong of running up the Government's debt.
    I look forward to working with my colleagues to take the 
responsibility of improving job creation in this country and 
fixing the long-term deficits that we face by ensuring that 
those responsible for our deficits pay their fair share.
    And with that, I yield back the balance of my time.
    [The prepared statement of Representative Becerra appears 
in the appendix.]
    Chairman Murray. Thank you very much.
    Senator Kyl?

              OPENING STATEMENT OF HON. JON KYL, 
                  A U.S. SENATOR FROM ARIZONA

    Senator Kyl. Thank you, Madam Chairman.
    And welcome, Mr. Elmendorf.
    The subject of the hearing today is ``The History and 
Drivers of the Nation's Debt and Its Threats.'' Obviously, you 
need to know what the problem is before you can develop 
solutions.
    One of the things we will hear is that entitlement spending 
is a key driver of our debt. And I think there is a consensus 
about that on both sides of the aisle. The concern I have is 
that some people fear that that means that the solution has to 
be a cut in benefits or a cut in payments to providers for 
programs like Medicare and Medicaid, for example, and I would 
like to focus very specifically on a potential alternative to 
that.
    There may be very substantial savings that can be obtained 
from administrative efficiencies that would not involve cuts in 
these programs. That is one of the things that I will be 
talking to Dr. Elmendorf about today.
    We hear a lot of talk about waste, fraud, and abuse. It is 
a trite phrase, but the reality is there is a significant 
amount of truth to it. And I think, especially with regard to 
Medicare and Medicaid, we have to find ways to achieve these 
administrative savings.
    Let me just quote from one of the experts from Cato 
Institute, Mike Cannon. In a Forbes blog less than 2 months 
ago, he says, ``Judging by official estimates, Medicare and 
Medicaid lose at least $87 billion per year to fraudulent and 
otherwise improper payments, and about 10.5 percent of Medicare 
spending and 8.4 percent of Medicaid spending was improper in 
2009.''
    Others, like Harvard fraud expert Malcolm Sparrow, say 
actually that is low. He said loss rates due to fraud and abuse 
could be 10, 20, maybe even 30 percent in some segments.
    Obviously, this is an important subject to address. And in 
order to do that, we may have to spend a little bit more money 
on the front end for people who can review the claims that are 
filed and so on, in order to make sure that they don't pay 
improper claims.
    But at the end of the day, one of the reasons we haven't 
attacked this problem is that the CBO has had a very difficult 
time in scoring potential savings based upon potential 
approaches to the problem. And what I want to explore with Dr. 
Elmendorf today is how CBO can help our committee find ways to 
achieve administrative efficiencies, saving a lot of the money 
that we should not be spending, so that we do have the money to 
spend on the beneficiaries and the providers of important 
programs like Medicare and Medicaid.
    Madam Chairman, Mr. Chairman, thank you.
    Chairman Murray. Senator Baucus?

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

    Senator Baucus. Thank you, Senator Murray.
    I want to begin just by echoing what Senator Kyl said. I 
think there is a lot of fraud and waste in the Medicare and 
Medicaid, which we don't properly attack, and much of that is 
due to scoring requirements that we have to adhere to. And I 
would hope that we could somehow create a way to get beyond 
that. It is an excellent point, and I am glad that he made it.
    One of our Founding Fathers, Patrick Henry, once said, ``I 
know of no way of judging the future, but by the past.'' And 
today, we examine the past for lessons to improve our economic 
future--to reduce the deficit, create jobs, and create the 
certainty our country needs to thrive in the global economy.
    The world is watching us. They are watching us closely. 
They are watching what we do and the next steps that we take as 
a country to confront our deficits. We can do this. We have 
already begun the process by cutting $900 billion. We have 
already done it. We have taken a first step.
    And while the road ahead will not be easy, we have a duty, 
I think, to think even bigger, aim higher, ensure our country 
is on sound fiscal footing for the long term. We have a duty, I 
think, to ensure that we approach these cuts in a balanced way 
that creates jobs.
    When I was home in Montana again last weekend, I heard over 
and over again, people said, ``Max, let's get it done. 
Appreciate you being on that committee. Get it done. We need 
our country to get it done.''
    I know every member of this panel hears the same comments 
from their constituents when they are home, just as every 
Member of Congress does. And I urge us to listen to the wishes 
of our employers.
    We are just the hired hands. We are just the employees. The 
people that we work for, the people that elect us or unelect us 
want us to get this done in a balanced, fair way.
    Today, we review the sources of our problem. It is obvious 
that the factors that created our current deficit are the cost 
of two wars; long-term healthcare costs, which we began to 
tackle in health reform; a stagnant economy, which increased 
spending; and reduced Federal revenues, which are at historic 
lows.
    Today, Federal revenues make up about 15 percent of GDP, 
compared to, for example, about 17 to 19 percent during the 
Reagan administration. A combination of factors created the 
deficit. It will take a combination of factors to resolve it. 
There is no silver bullet. So let's get together and get our 
work done.
    [The prepared statement of Senator Baucus appears in the 
appendix.]
    Chairman Murray. Thank you very much.
    Representative Upton?

             OPENING STATEMENT OF HON. FRED UPTON, 
              A U.S. REPRESENTATIVE FROM MICHIGAN

    Representative Upton. Well, thank you, Madam Chair.
    And I intend to be brief. Chris Van Hollen reminded us last 
week that we had 77 days to get this thing done. That means we 
have about 72 days now, and we are going to leave some extra 
days, hopefully, for you, Dr. Elmendorf, to have your green 
eyeshade guys and women be able to put this package together 
for us to reach the goal.
    Last week, I sat with Chairman Camp and Chairman Baucus--
and Chairman Baucus, again, my folks in Michigan this last 
weekend assured me that they are rooting for us as well to get 
a solution to the problem that they all really do understand. 
And I know the three of us were on our feet when the President 
talked about entitlement reform, specifically Medicare and 
Medicaid. And I must say that I was disappointed that I did not 
see the President's written proposal come up like he did some 
others yesterday.
    So I just want to say I am looking forward to working with 
all my colleagues here. I am going to submit my full statement 
for the record so that we can go back, so that we, in fact, all 
can go to work to get this thing done.
    I yield back.
    [The prepared statement of Representative Upton appears in 
the appendix.]
    Chairman Murray. Thank you very much.
    Representative Clyburn?

            OPENING STATEMENT OF HON. JIM CLYBURN, 
           A U.S. REPRESENTATIVE FROM SOUTH CAROLINA

    Representative Clyburn. Thank you very much, Madam Chair, 
Mr. Chairman.
    Dr. Elmendorf, thank you for taking the time to talk with 
us today.
    I think it is appropriate that today's hearing is entitled, 
``The History and Drivers of Our Nation's Debt and Its 
Threats.'' If we want to solve the related problems of debt and 
joblessness, we need to know how these problems arose. In 2000, 
we had a $236 billion surplus and had begun paying down our 
National debt. The economy was booming for all Americans, 
unemployment was at 4 percent, and the poverty rate dipped to 
its lowest level since 1979.
    Instead of building on the policies that have served us so 
well, we embarked upon two wars, one of which was dubious at 
best. Using credit cards, we instituted two tax cuts, totaling 
$544 billion, which were tilted in favor of millionaires and 
billionaires. We created a new prescription drug benefit 
program, which CBO estimates will cost $967 billion over the 
next 10 years, and allowed mortgage lenders to gamble away the 
economic prosperity of millions of American families.
    And then it was declared that deficits don't matter. This 
special committee was created because deficits and debt do 
matter. Now we find ourselves with painfully slow growth, 
unacceptably high unemployment, deficits as far as our eye can 
see, and a mounting long-term debt burden.
    As we work together to achieve significant deficit 
reduction, it is important for us to remember how we got here. 
Many factors got us into this situation, and many factors are 
needed to get us out.
    We must balance the budget with a balanced approach that 
includes job creation, revenue increases, and smart spending 
cuts. Shared sacrifice will be required. We cannot solve the 
problem on the backs of the most vulnerable in our society who 
did nothing to cause the problem.
    I am willing to make tough compromises. I have said that if 
the distance between an opponent and me is five steps, I am 
willing to take three, as long as the opponent takes the other 
two.
    Dr. Elmendorf, thank you again for being here, and I look 
forward to discussing these issues with you in the Q&A period.
    Thank you, and I yield back.
    [The prepared statement of Representative Clyburn appears 
in the appendix.]
    Chairman Murray. Senator Portman?

            OPENING STATEMENT OF HON. ROB PORTMAN, 
                    A U.S. SENATOR FROM OHIO

    Senator Portman. Thank you, Madam Chair.
    And welcome to Director Elmendorf. As you all know, this 
committee is going to be relying heavily on you for your 
analysis and for your scoring. And to you and your colleagues 
behind you, I thank you in advance for the many hours that you 
will put in. Our success or failure will depend in large 
measure on your good work. So we need you and look forward to 
your responses to our many requests.
    I listen to my colleagues' comments this morning, and I 
must say I am delighted that you are here today because we need 
to have a little objective analysis of how we got to where we 
are, and I know you will provide that. I hope you will also 
talk about the appropriate baseline for us to use to examine 
our proposals.
    When measuring new proposals, the baseline questions help 
us determine ``compared to what,''--whether it is a spending 
issue or revenue issue. And as you know, I have some concerns 
about the current law baseline because I don't think it is 
realistic. And I want you to address that today, if you could. 
Is the current-law or current-policy baseline more realistic? 
Or is there another one like the long-term extended baseline, 
alternative fiscal scenario? All these questions matter greatly 
in our work.
    We have a $1.5 trillion task over the next 10 years. This, 
of course, is a huge challenge. But I would also like your 
analysis of how that compares to what you see as the real 
fiscal challenge over the next 10 years and the real economic 
challenge we face.
    As many of the colleagues on the committee have mentioned 
this morning, obviously our economy is directly linked to what 
we do. And we will hear about this today from you. We will see 
how we got in this situation we are in, largely because of 
economic conditions. Just as in the late '90s because of the 
growing economy we were able to come to a unified balanced 
budget faster than anybody expected.
    Using your data and the current policy baseline, as I look 
at $1.5 trillion, I think it is about 4 percent of projected 
spending over the next 10 years. So, in that sense, $1.5 
trillion seems realistic. It is also, as I look at it, based 
on, again, your data and the current policies, less than 20 
percent of the projected increase in the deficit over the next 
10 years.
    So $1.5 trillion seems to me to be something we should be 
doing at the very least. Again, I look forward to your insights 
on that and what is the most realistic baseline.
    I hope you and your colleagues will also help us better 
understand the impacts of policy choices over the coming 
decades. As I look at your projections, it seems to me that 
deficit and debt levels would be devastating to our economy 
over the second, third, and fourth 10 years if we don't do 
something about the longer-term impact.
    So while we could within this budget window find ways to 
get to $1.5 trillion, it will not be something that markets 
will react to well, in my view, unless we also are looking at 
long-term impacts. I would love to have your view there.
    The long-term budget estimates are so unsustainable that 
your alternative budget scenario simply stops calculating the 
national debt after 2036 because it is so unsustainable. We 
will have crossed into totally unchartered territory.
    Clearly, entitlement spending is driving those long-term 
deficits to impossible levels. I am interested in hearing what 
reforms you think can protect those in need, which we must do, 
while at the same time modernizing these programs and placing 
them on a sustainable path for future generations.
    Again, thank you for being before us. And more importantly, 
thank you for all the hard work you will be doing with us over 
the next several weeks.
    [The prepared statement of Senator Portman appears in the 
appendix.]
    Chairman Murray. Thank you.
    Senator Kerry?

             OPENING STATEMENT OF HON. JOHN KERRY, 
               A U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Madam Chairwoman, thank you.
    We all agree that we are facing an unsustainable financial 
future, and under the CBO's alternative fiscal scenario, the 
debt is going to reach 82 percent of GDP by 2021. That is 
higher than any year since 1948, and we all agree we can't let 
that happen.
    But to avoid that dismal scenario, we are going to have to 
be pretty clear-eyed about the way that we got here and the 
forces that keep us on this dangerous trajectory. I think it is 
factual to say that this road began now more than a decade ago. 
Some would argue even longer.
    But you have economic meltdown, two wars, rounds of the 
largest tax cuts in history that did not produce the jobs that 
were predicted, and then efforts to forestall larger economic 
collapse more recently. All of these contributed.
    Demographic challenges loom large in the outyears, and it 
is more than just a spending problem, narrowly defined. And I 
think we do the dialogue a disservice by oversimplifying it 
because if it was a mere spending issue, it would be a lot 
easier to solve. But also because many tax expenditures are a 
form of spending in disguise.
    Now while there may be partisan interpretations of how we 
got here, there is a bipartisan consensus not just about the 
urgency of action to dig us out of this mess, but about the 
approach that it requires. When I say bipartisan, three 
bipartisan groups that looked at the problem in recent months--
Rivlin-Domenici, Simpson-Bowles, and the so-called Gang of 
Six--have all said--all, unanimously--that any real solution 
needs to be balanced with a mix of revenues and spending cuts 
and long-term reforms.
    Now we benefit from their guideposts, and we also benefit 
from the cautionary lessons, important cautionary lessons of 
other countries. That means not fixating on austerity measures 
alone, particularly in the short term.
    We have seen the damage that they have caused across 
Europe, and we can't put our own fragile economy in jeopardy by 
taking actions that will slow economic growth and decrease job 
creation. We need growth, not just revenue and not just cuts. 
And any economist worth their salt, any business person in 
America today will tell us creating jobs today helps reduce the 
deficit tomorrow.
    Last week, the Committee for a Responsible Budget, a 
bipartisan organization including some of our country's leading 
experts on budget issues, including the co-chairs of the fiscal 
commission, recommended that this committee go big, go long, 
and go smart. I think Director Elmendorf's testimony today 
helps solidify the reality that we need to go big and reap 
savings of more than $1.5 trillion to address long-term 
deficits. We need to go long and address our long-term budget 
issues. And most importantly, we need to go smart and address 
the budget without preconceived dogmas or political agendas.
    So I look forward to delving into these issues today with 
you, Dr. Elmendorf, and thank you for coming here to help us 
shape fair, balanced, thoughtful recommendations for this 
committee.
    [The prepared statement of Senator Kerry appears in the 
appendix.]
    Chairman Murray. Representative Camp?

             OPENING STATEMENT OF HON. DAVE CAMP, 
              A U.S. REPRESENTATIVE FROM MICHIGAN

    Representative Camp. Thank you, Madam Chair.
    There has been a lot of important things already said this 
morning. Our time is short today. Both in the committee and as 
Mr. Upton pointed out, our time is short in terms of trying to 
meet the responsibilities we have been given under the Budget 
Control Act.
    So I look forward to hearing from Mr. Elmendorf. I think it 
is important that we just get down to business. So I will yield 
back the balance of my time.
    Chairman Murray. Thank you.
    Representative Van Hollen?

          OPENING STATEMENT OF HON. CHRIS VAN HOLLEN, 
              A U.S. REPRESENTATIVE FROM MARYLAND

    Representative Van Hollen. Thank you, Madam Chairman.
    Yesterday, there were two important developments that 
relate to our work. First, the President submitted to the 
Congress a jobs plan that is fully paid for over 10 years. 
Every day that Americans are out of work is another day that 
the country is hurting and the deficit is growing.
    The fastest and most effective way to reduce the deficit in 
the short term is to put Americans back to work. I hope this 
committee will address that reality in our work as we move 
forward.
    Second, yesterday, as Senator Kerry mentioned, the co-
chairs of the Bipartisan National Commission on Fiscal 
Responsibility, Alan Simpson and Erskine Bowles, called upon 
this committee to ``go big,'' urging us to use this unique 
opportunity to develop a plan to reduce the deficit by about $4 
trillion over 10 years, including the almost $1 trillion in 
savings from the Budget Control Act. They are right. I believe 
we should proposal a plan of that size.
    The bipartisan Simpson-Bowles commission, the bipartisan 
Rivlin-Domenici commission, as well as the Gang of Six, have 
provided us with a framework of how to achieve that goal. What 
is clear in all of them is that we need a balanced approach to 
reduce the deficit, one that contains savings achieved from 
modernizing certain programs, as well as savings gained by 
simplifying and reforming the tax code in a way that generates 
revenue.
    Addressing a problem of this magnitude requires shared 
responsibility in order to grow our economy and reduce the 
deficit. The testimony we will hear today from Mr. Elmendorf 
demonstrates why such a balanced approach is necessary. It 
vividly illustrates the policy choices driving our deficit are 
the significant cuts made to revenue, combined with increasing 
retirement and healthcare costs due to the retirement of the 
baby boomers.
    Let's not duck those realities. Let's follow the advice of 
the three other bipartisan commissions and go big. I don't 
agree with every one of their proposals, but those three groups 
have provided this bipartisan group with a framework from which 
to start.
    Time is short. The clock is ticking. I hope we will get to 
work and follow that balanced framework approach that has been 
set by, again, three other bipartisan groups that look to 
tackle the issues that this committee is asked to address.
    Thank you, Madam Chairman.
    [The prepared statement of Representative Van Hollen 
appears in the appendix.]
    Chairman Murray. Thank you.
    Senator Toomey?

             OPENING STATEMENT OF HON. PAT TOOMEY, 
                A U.S. SENATOR FROM PENNSYLVANIA

    Senator Toomey. Thanks, Madam Chair.
    And Dr. Elmendorf, thank you. I look forward to working 
with you as well.
    Just a couple of points I wanted to stress. I think the 
point has been made, but I want to underscore that the problem 
that we face is, of course, much worse than what the current 
law baseline would seem to suggest. That is not a criticism. It 
is simply an observation.
    The current law baseline is not meant to be a predictor of 
the future. If it were, it would be a really bad one, as we 
know.
    In addition, some things have changed since you did that. 
The economy has gotten weaker. I would argue the sovereign debt 
crisis in Europe has gotten worse. So these things have 
aggravated the situation.
    And then there is the fact that I think the risks are 
greater for downside surprises than upside surprises, if you 
will--things like the contingent liabilities that are lurking 
out there, which could come home to roost at any point in time.
    The assumptions that you make about interest rates are not 
necessarily unreasonable. But if they are wrong, it is most 
likely that rates will be much higher rather than lower, 
significantly aggravating our problem. So I want to underscore 
that I think we should be striving to do every bit as much as 
we possibly can.
    I hope that we will be able to dwell somewhat today on just 
how significant the big entitlement programs are the long-term 
drivers of this problem. And I hope we will be able to discuss 
what I see as a real danger in taking the approach that I think 
you might be advocating, although I am not entirely clear--the 
danger of delaying the spending cuts for fear that we will 
weaken a fragile economy.
    On page 29 of your testimony, you do go through a list of 
the risks associated with delaying spending cuts now. I would 
argue that if we tolerate or aggravate the current deficit 
problem with the promise that we will work it all out in the 
future, that is a very, very dangerous direction to head in. 
And at the end of the day, there is no free lunch, and a 
Government spending expansion here is actually going to do more 
harm than good.
    So, finally, the one point that I really want to underscore 
is just the importance of growth. If we can have policies that 
will encourage maximizing economic growth, all problems are 
easier to solve with a strong, growing economy. And I think 
that should guide our decisions.
    With that, Madam Chair, I yield the balance of my time.
    Chairman Murray. Thank you very much.
    With that, we will turn to our witness for today. Dr. 
Douglas Elmendorf is the eighth Director of the Congressional 
Budget Office. His term began on January 22, 2009.
    Before he came to CBO, Dr. Elmendorf was a senior fellow in 
the Economic Studies Program at Brookings Institution. As the 
Edward M. Bernstein Scholar, he served as co-editor of the 
Brookings Papers on Economic Activity and the Director of the 
Hamilton Project, an initiative to promote broadly shared 
economic growth.
    He has served as an assistant professor at Harvard 
University, a principal analyst at the Congressional Budget 
Office, a senior economist at the White House Council of 
Economic Advisers, a Deputy Assistant Secretary for Economic 
Policy at the Treasury Department, and an Assistant Director of 
the Division of Research and Statistics at the Federal Reserve 
Board. In those positions, Dr. Elmendorf has gained a wide 
range of expertise on budget policy, Social Security, Medicare, 
national healthcare reform, financial markets, macroeconomic 
analysis and forecasting, and many other topics.
    So I am very glad that he has agreed to join our committee 
here today. Dr. Elmendorf, thank you so much for taking the 
time and for helping us get through this. And we would look 
forward to your testimony.

            STATEMENT OF DOUGLAS ELMENDORF, PH.D., 
             DIRECTOR, CONGRESSIONAL BUDGET OFFICE

    Dr. Elmendorf. Thank you, Senator Murray, Congressman 
Hensarling, and all the members of the committee.
    I appreciate the invitation to talk with you today about 
the economic and budget outlook and about CBO's analysis of the 
fiscal policy choices facing this committee and the Congress.
    The Federal Government is confronting significant and 
fundamental budgetary challenges. If current policies are 
continued in coming years, the aging of the population and 
rising costs for healthcare will push up Federal spending 
measured as a share of GDP well above the amount of revenue 
that the Federal Government has collected in the past. As a 
result, putting the Federal budget on a sustainable path will 
require significant changes in spending policies, significant 
changes in tax policies, or both.
    Addressing that formidable challenge is complicated by the 
current weakness of the economy and the large numbers of 
unemployed workers, empty houses, and underused factories and 
offices. Changes that might be made to Federal spending and 
taxes could have a substantial impact on the pace of economic 
recovery during the next few years, as well as on the Nation's 
output and people's income over the longer term.
    I will talk briefly about the outlook for the economy and 
the budget and then turn to some key considerations in making 
fiscal policy. The financial crisis and recession have cast a 
long shadow on the U.S. economy. Although output began to 
expand 2 years ago, the pace of recovery has been slow, and the 
economy remains in a severe slump.
    CBO published its most recent economic forecast in August. 
That forecast was initially completed in early July and updated 
only to incorporate the effects of the Budget Control Act. In 
our view, incoming data and other developments since early July 
suggest that the economic recovery will continue, but at a 
weaker pace than we had anticipated.
    With output growing at only a modest rate, CBO expects 
employment to expand very slowly, leaving the unemployment 
rate, as depicted by the dots in the figure, close to 9 percent 
through the end of next year. I should say all these figures 
are taken from the written testimony and nearly in the order in 
which they appear in the testimony.
    As a result, we think that a large portion of the economic 
and human costs of this downturn remain ahead of us. The 
difference between output and our estimate of the potential 
level of output, shown by the gap between the lines in the 
figure, has cumulated so far to about $2.5 trillion. By the 
time output rises back to its potential, which will probably be 
several years from now, we expect that cumulative shortfall to 
be about twice as large as it is today, or $5 trillion.
    Not only are the costs associated with this shortfall and 
output immense, they are also borne unevenly, falling 
disproportionately on people who lose their jobs, are displaced 
from their homes, or own businesses that fail.
    I want to emphasize that the economic outlook is highly 
uncertain. Many developments could cause economic outcomes to 
differ substantially in one direction or the other from those 
we currently anticipate. If the recovery continues as expected 
and if tax and spending policies unfold as specified in current 
law, deficits will drop markedly as a share of GDP over the 
next few years.
    Under CBO's baseline projections, shown by the dark blue 
portion of the bars in the figure, deficits fall to about 6 
percent of GDP in 2012, about 3 percent in 2013, and smaller 
amounts for the rest of the decade. In that scenario, deficits 
over the decade total about $3.5 trillion.
    But as a number of you have said, those baseline 
projections understate the budgetary challenges because changes 
in policy that will take effect under current law will produce 
a Federal tax system and spending for some Federal programs 
that differ sharply from the policies that many people have 
become accustomed to.
    Specifically, CBO's baseline projections include the 
following policies specified in current law. First, certain 
provisions of the 2010 Tax Act, including extensions of lower 
rates and expanded credits and deductions enacted in 2001, 
2003, and 2009, all expire at the end of next year.
    Second, the 2-year extension of provisions designed to 
limit the reach of the alternative minimum tax, the extensions 
of emergency unemployment compensation, and the 1-year 
reduction in the payroll tax all expire at the end of this 
year.
    Third, sharp reductions in Medicare's payment rates for 
physician services take effect at the end of this year.
    Fourth, funding for discretionary spending declines over 
time in real terms in accordance with the caps established 
under the Budget Control Act.
    And fifth, additional deficit reduction of more than $1 
trillion will be implemented as required under the act.
    Changing provisions of current law so as to maintain major 
policies that are in effect now would produce markedly 
different budget outcomes.
    For example, and shown by the full bars in the figure, if 
most of the provisions of the 2010 Tax Act were extended, if 
AMT was indexed for inflation, and if Medicare's payment rates 
for physician services were held constant, then deficits over 
the coming decade would total $8.5 trillion, rather than the 
$3.5 trillion in the current law baseline. By 2021, debt held 
by the public would reach 82 percent of GDP, higher than in any 
year since 1948.
    Yesterday, CBO released an analysis of the enforcement 
procedures of the Budget Control Act. As shown in the slide, we 
estimate that if no legislation originating from this committee 
is enacted, the following would occur over the next decade.
    Reductions in the caps on discretionary appropriations for 
defense would cut outlays by about $450 billion. Reductions in 
the caps on discretionary appropriations for nondefense 
purposes would cut outlays by about $300 billion. And 
reductions in mandatory spending would yield net savings of 
about $140 billion. The total reduction deficits would be about 
$1.1 trillion.
    The estimated reductions in mandatory spending are 
comparatively small because the law exempts a significant 
portion of such spending from the enforcement procedures. As a 
result, about 70 percent of the total savings would come from 
lower discretionary spending. Cuts in defense and nondefense 
spending of that magnitude would probably lead to reductions in 
the number of military and civilian employees and in the scale 
and scope of Federal programs.
    Beyond the coming decade, as you know, the fiscal outlook 
worsens, as the aging of the population and rising costs for 
healthcare put significant and increasing pressure on the 
budget under current law. When CBO issued its most recent long-
term outlook in June, debt held by the public was projected to 
reach 84 percent of GDP in 2035 under current law and about 190 
percent of GDP under policies that more closely resemble the 
current policies.
    Although new long-term projections would differ because we 
would incorporate the latest 10-year projections, the amount of 
Federal borrowing that would be necessary under current 
policies would be clearly unsustainable. In sum, the Federal 
budget is quickly heading into territory that is unfamiliar to 
the United States and to most other developed countries as 
well.
    As this committee considers its charge to recommend 
policies that would reduce future budget deficits, its key 
choices fall into three broad categories listed in the slide. 
How much deficit reduction should be accomplished? How quickly 
should deficit reduction be implemented? What form should 
deficit reduction take? Let me take up these questions briefly 
in turn.
    First, regarding the amount of deficit reduction, there is 
no commonly agreed upon level of Federal debt that is 
sustainable or optimal. Under CBO's current law baseline, debt 
held by the public is projected to fall from 67 percent of GDP 
this year to 61 percent in 2021. However, stabilizing the debt 
at that level would still leave it larger than in any year 
between 1953 and 2009.
    Lawmakers might determine that debt should be reduced to 
amounts lower than those shown in CBO's baseline and closer to 
those we have experienced in the past. That would reduce the 
burden of debt on the economy, relieve some of the long-term 
pressures on the budget, diminish the risk of a fiscal crisis, 
and enhance the Government's flexibility to respond to 
unanticipated developments. Of course, it would also require 
larger amounts of deficit reduction.
    Furthermore, lawmakers might decide that some of the 
current policies scheduled to expire under current law should 
be continued. In that case, achieving a particular level of 
debt could require much larger amounts of deficit reduction 
from other policies.
    For example, if most of the provisions in the 2010 Tax Act 
were extended, the AMT was indexed for inflation, and 
Medicare's payment rates for physicians were held constant, 
then reducing debt in 2021 to the 61 percent of GDP projected 
under current law would require other changes in policies to 
reduce deficits over the next 10 years by a total of $6.2 
trillion, rather than the $1.2 trillion needed from this 
committee to avoid automatic budget cuts.
    In 2021 alone, the gap between Federal revenues and 
spending if those policies were continued and no other 
budgetary changes were made, as shown by the right pair of bars 
in the figure, is projected to be 4.7 percent of GDP. Putting 
debt on a downward trajectory relative to GDP in that year 
would require a much smaller deficit. Reaching that objective, 
declining debt relative to the GDP from that starting point 
would require a reduction in the deficit of about 2.5 percent 
of GDP, or $600 billion in that year alone.
    Your second set of choices involves the timing of deficit 
reduction, which involves difficult tradeoffs summarized in the 
slide. On one hand, cutting spending or increasing taxes slowly 
would lead to a greater accumulation of Government debt and 
might raise doubts about whether the longer-term deficit 
reductions would ultimately take effect.
    On the other hand, implementing spending cuts or tax 
increases abruptly would give families, businesses, and State 
and local governments little time to plan and adjust. In 
addition, and particularly important given the current state of 
the economy, immediate spending cuts or tax increases would 
represent an added drag on the weak economic expansion.
    However, credible steps to narrow budget deficits over the 
longer term would support output and employment in the next few 
years by holding down interest rates and reducing uncertainty, 
thereby by enhancing confidence by businesses and consumers. 
Therefore, the near-term economic effects of deficit reduction 
would depend on the balance between changes in spending and 
taxes that take effect quickly and those that take effect 
slowly.
    As shown in this next slide, credible policy changes that 
would substantially reduce deficits later in the coming decade 
and beyond without immediate spending cuts or tax increases 
would both support the economic expansion in the next few years 
and strengthen the economy over the longer term.
    Moreover, there is no inherent contradiction between using 
fiscal policy to support the economy today while the 
unemployment rate is high and many factories and offices are 
underused and imposing fiscal restraint several years from now 
when output and employment will probably be close to their 
potential. If policymakers wanted to achieve both a short-term 
economic boost and longer-term fiscal sustainability, the 
combination of policies that would be most effective, according 
to our analysis, would be changes in taxes and spending that 
would widen the deficit today, but narrow it later in the 
decade.
    Such an approach would work best if the future policy 
changes were sufficiently specific, enacted into law, and 
widely supported so that observers believe that the future 
restraint would truly take effect.
    Your third set of choices involves the composition of 
deficit reduction. Federal spending and revenues affect the 
total amount and types of output that are produced, the 
distribution of that output among various segments of society, 
and people's well-being in a variety of ways.
    In considering the challenge of putting fiscal policy on a 
sustainable path, many observers have wondered whether it is 
possible to return to previous policies regarding Federal 
spending and revenues. Unfortunately, the past combination of 
policies cannot be repeated when it comes to the Federal 
budget. The aging of the population and rising costs for 
healthcare have changed the backdrop for budget decisions in a 
fundamental way.
    Under current law, spending on Social Security, Medicare, 
and other major healthcare programs, the darkest line in the 
figure, is projected to reach about 12 percent of GDP in 2021, 
compared with an average of about 7 percent during the past 40 
years. That is an increase worth 5 percent of GDP. Most of that 
spending goes to benefits for people over age 65, with smaller 
shares for blind and disabled people and for nonelderly, able-
bodied people.
    In stark contrast, under current law, all spending apart 
from Social Security and the major healthcare programs and 
interest payments on the debt is projected to decline 
noticeably as a share of the economy. That broad collection of 
programs includes defense, the largest single piece; the 
Supplemental Nutrition Assistance Program, formerly known as 
food stamps; unemployment compensation; veterans benefits; 
Federal civilian and military retirement benefits; 
transportation; health research; education and training; and 
other programs.
    That whole collection of programs has incurred spending 
averaging 11.5 percent of GDP during the past 40 years. With 
expected improvement in the economy and the new caps on 
discretionary spending, it falls in our projection by 2021 to 
less than 8 percent of GDP, the lowest share in more than 40 
years, under current law and in our baseline projections.
    Putting those pieces together and including interest 
payments, between 1971 and 2010, as shown by the left pair of 
bars in the figure, Federal spending averaged about 21 percent 
of GDP. But under current law for 2021, as shown by the right 
pair of bars, CBO projects it to grow to about 23 percent of 
GDP.
    Alternatively, if the laws governing Social Security and 
the major healthcare programs were unchanged and all other 
programs were operated in line with their average relationship 
to the size of the economy during the past 40 years, Federal 
spending would be much higher in 2021, around 28 percent of 
GDP. That amount exceeds the 40-year average for revenues as a 
share of GDP by about 10 percentage points.
    In conclusion, given the aging of the population and rising 
costs for healthcare, attaining a sustainable Federal budget 
will require the United States to deviate from the policies of 
the past 40 years in at least one of the following ways. Raise 
Federal revenues significantly above their average share of 
GDP, make major changes in the sorts of benefits provided for 
Americans when they become older, or substantially reduce the 
role of the rest of the Federal Government relative to the size 
of the economy.
    My colleagues and I at CBO stand ready to provide the 
analysis and information that can help you in making these 
important choices.
    Thank you. I am happy to take your questions.
    [The prepared statement of Dr. Elmendorf appears in the 
appendix.]
    Chairman Murray. Thank you very much, Dr. Elmendorf.
    As we begin the work that has been outlined for us as a 
committee under the Budget Control Act, I think it is helpful 
for us to have a clear understanding of the scope of the 
problem, and you laid that out very clearly for us. I think we 
all agree this task is pretty enormous, and we have to come 
together around a balanced approach that addresses our fiscal 
situation, but also focuses on making sure that we remain 
competitive and looks at our long-term growth.
    So I wanted to start by just asking you to expand a little 
bit on what you were just talking about and talk to us about 
what we should consider in weighing the tradeoffs between 
helping our economy in the short term to help create growth and 
not causing significant harm in the long term.
    Dr. Elmendorf. In our judgment, and this is consistent with 
a consensus of professional opinion, cuts in spending or 
increases in taxes at a moment when there are a lot of unused 
resources in the economy--unemployed workers, empty homes, 
unused factories and offices--and when monetary policy is 
finding it difficult to provide further support for economic 
activity because the Federal funds rate is already very close 
to zero, then under those conditions cuts in spending and 
increases in taxes will tend to slow the economic recovery. 
They will tend to reduce the levels of output and employment 
relative to what would otherwise be.
    At the same time, and this is also quite consistent with a 
consensus professional opinion, over time, as our economy moves 
back toward potential output and those unused resources become 
used again, under those sorts of economic conditions, cuts in 
spending or increases in taxes that reduce outsize budget 
deficits are good for the economy, bolster output and incomes.
    That may seem like a paradox, but it isn't really. It is 
just reflecting the view that the effect of Federal fiscal 
policy on the economy depends on economic conditions and on the 
stance and abilities of monetary policy.
    And that is why, in our judgment, the analysis that we have 
done and presented to the Congress on a number of occasions 
over the past few years, to provide the greatest boost to 
economic activity now and over the medium run and long run, the 
combination of fiscal policies likely to be most effective 
would be policies that cut taxes or increase spending in the 
near term, but over the medium and longer term move in the 
opposite direction and cut spending or raise taxes.
    Chairman Murray. Okay. Thank you.
    Dr. Elmendorf, as you know, several bipartisan groups have 
released reports in the last 9 months with recommendations for 
reining in our deficit and spending and stemming the rise of 
Federal debt. All of them came with a balanced approach, and I 
am concerned that Congress has not yet included revenues or 
entitlements, as we have focused only so far on discretionary 
spending cuts and caps, when I think we need to be looking at 
balanced approaches.
    Now some have made it clear that they want entitlements off 
the table. Others have made it clear they want revenues off the 
table. Unfortunately, that leaves only a relatively very small 
amount of discretionary and mandatory spending that Members so 
far have been willing to focus on.
    Would you agree that while cuts and caps we instituted 
within the Budget Control Act can help somewhat with the long 
term, what we really need is a comprehensive approach that does 
address both revenue and mandatory programs?
    Dr. Elmendorf. So, Senator, as a matter of arithmetic, 
there are a lot of different paths to reducing budget deficits, 
and it is not CBO's role to make recommendations among those 
alternative paths. I think the crucial point, though, is that 
the more large pieces of the puzzle one takes off the table, 
then the greater the changes will need to be in the remaining 
pieces.
    You can see this very clearly in this picture. In 2021, 
this pictures shows, under current law, revenues being about 21 
percent of GDP. If one instead wants to----
    Senator Baucus. Can you explain that? We can't see it.
    Chairman Murray. It is hard to see.
    Dr. Elmendorf. I am sorry. So this is Figure 14 in the 
written testimony, if you have that in front of you? What the 
left-hand--I will explain it.
    Senator Baucus. Exhibit 14?
    Dr. Elmendorf. Yes. Exhibit 14.
    Senator Baucus. Thank you.
    Dr. Elmendorf. Figure 14 in the written testimony. The 
left-hand set of bars shows the averages over the last 40 
years. The far left bar is revenues. Revenues have averaged 
about 18 percent of GDP. Then the right-hand bar shows the 
major pieces of spending. The bottom chunk is Social Security 
and major healthcare programs. This is----
    Senator Baucus. Could you try a page?
    Chairman Murray. Page 42.
    Senator Baucus. Forty-two. Thank you.
    Dr. Elmendorf. The left-hand piece, as I said, is revenues. 
They have averaged 18 percent of GDP. The right-hand bar shows 
spending, Social Security, and the major healthcare programs--
that is Medicare, Medicaid, now CHIP--in the future, including 
subsidies to be provided through insurance exchanges. In the 
past, that has averaged about 7 percent of GDP.
    All other non-interest spending--that is other mandatory 
spending, it is defense spending, it is nondefense 
discretionary spending--has averaged 11.5 percent of GDP. And 
interest payments have averaged about 2.25 percent of GDP. With 
the deficit, that has been a little under 3 percent.
    For 2021, under current law, revenues would rise to be 
about 21 percent of GDP. Social Security and the major 
healthcare programs would be 12, a little over 12 percent of 
GDP. That is 5 percent of GDP more than the average for the 
past 40 years, and that is the essence of the point that the 
aging of the population and rising costs for healthcare have 
changed the backdrop for the decisions that you and your 
colleagues make.
    If those policies continue to operate--those programs 
continue to operate in the way they have operated in the past, 
they will be much more expensive than they have been in the 
past because there will be more people collecting benefits, and 
each person will be collecting more in benefits. And that is 
the crucial driver of the future budget trajectory relative to 
what we have seen in the past.
    The other category, other non-interest spending, as you can 
see, is already much smaller in 2021 under current law and our 
projections than it has been historically. And that is a 
combination of improvement in the economy, which we think will 
reduce the number of people on food stamps, collecting 
unemployment insurance, and so on, but also discretionary 
spending caps that reduce both defense spending and nondefense 
discretionary spending in real terms and thus reduce them 
fairly sharply as shares of GDP.
    Chairman Murray. Dr. Elmendorf, I am out of time.
    Dr. Elmendorf. Sorry.
    Chairman Murray. And as chair, I am trying to keep 
everybody to that. But I appreciate that response and want to 
turn it over to my co-chair, Congressman Hensarling.
    Co-Chair Hensarling. Thank you, Madam Co-Chair.
    And Dr. Elmendorf, maybe we will continue on this line of 
questioning. Is it possible to pull up your Figure 12 from your 
testimony, if somebody could help me with that?
    Dr. Elmendorf. Figure 12?
    Co-Chair Hensarling. Page 39 of your testimony. I believe 
it is entitled Figure 12.
    Now as I understand it, this chart is a chart of historic 
and projected growth on Social Security, Medicare, other major 
healthcare programs. You wouldn't happen to have this chart 
plotted against growth in GDP, would you?
    Dr. Elmendorf. So these are shares of GDP. This is spending 
on these programs expressed as a percentage of GDP.
    Co-Chair Hensarling. Okay. But historic average, post World 
War II GDP has averaged what, roughly 3 percent annual economic 
growth?
    Dr. Elmendorf. I think that is about right, Congressman. I 
don't know for sure.
    Co-Chair Hensarling. Okay. On your Figure 14, again, Social 
Security and major healthcare programs have averaged 7.2 
percent of GDP. Current law, going to 12.2 percent of GDP in 
just 10 years. So from 7.2 to 12.2, not quite double, but 
certainly that could be described as explosive growth, could it 
not?
    Dr. Elmendorf. Very rapid, Congressman. Yes.
    Co-Chair Hensarling. We won't parse terms. As I am looking 
at some of your CBO data just for the last 10 years, apparently 
Social Security has grown at an average of 5.8 percent, 
Medicare 9.1 percent, Medicaid 8.8 percent in the last decade. 
And again, we now have a revised GDP growth outlook coming out 
of your August revision of your baseline.
    So, is it a fair assessment that we have Social Security, 
Medicare, other healthcare programs that are potentially 
growing two and three times the rate of growth in our economy?
    Dr. Elmendorf. They have grown much faster in the past, and 
our projections are for them to continue to outpace economic 
growth. Of course, the exact amount is uncertain, but the gap 
in the growth rates that we have seen historically has been 
very large, as you said.
    Co-Chair Hensarling. Now, Senator Toomey certainly in his 
comments talked about the current law baseline, and although an 
important exercise, it is certainly not dispositive to the task 
in front of us. But under a current law baseline, Medicare 
physicians are due to take essentially a 30 percent pay cut 
next year. Correct?
    Dr. Elmendorf. Yes. That is right.
    Co-Chair Hensarling. Does CBO--I believe recently you 
testified that CBO did not have a model to really impact--to 
show the impact of such a cut on healthcare delivery. Is that 
correct? Is CBO developing a model, or is that beyond the scope 
of what you do?
    Dr. Elmendorf. It is in the long-term plan, Congressman. We 
and others have raised concerns that the much slower growth 
projected for payments to physicians through Medicare relative 
to the private sector could affect the access to care or 
quality of care received by beneficiaries. But we do not have a 
model and are not about in the near term to have a model that 
would enable us to make any more specific predictions along 
those lines, I am afraid.
    Co-Chair Hensarling. Well, what I am trying to get at is 
clearly--and again, I quoted the President, who I don't often 
agree with, in our last organizational meeting, where he said, 
``The major driver of our long-term liabilities, everybody here 
knows, is Medicare and Medicaid and our healthcare spending. 
Nothing comes close.'' And I take it you would probably agree 
with that assessment as well, Dr. Elmendorf?
    Dr. Elmendorf. Yes. That is right.
    Co-Chair Hensarling. But I am also trying to get to the 
qualitative aspect of this, too, in our current systems, and 
you say CBO is developing a model. I know that CMS actuaries 
have said as essentially if that under the current baseline 
that, ``Medicare beneficiaries would almost certainly face 
increasingly severe problems with access to care.'' That is the 
Medicare actuaries, August of 2010.
    The Medicare trustees 2011 report, talking about the 
growing insolvency, ``Beneficiary access to healthcare services 
would be rapidly curtailed.''
    The President's Administrator for Centers for Medicare and 
Medicaid Services has said, ``The decision is not whether or 
not we will ration care. The decision is whether we will ration 
with our eyes open.''
    So, to some extent, Dr. Elmendorf, even though CBO doesn't 
have a model, we are looking at not just programs that are 
driving the insolvency of our country, but in many respects, 
left unreformed, is also shortchanging the beneficiaries as 
well. Would you agree with that assessment, or again, until you 
have your model, that is----
    Dr. Elmendorf. I think all I can say, Congressman, is that 
the extent of the pressure on providers of care to Medicare 
beneficiaries may depend a lot on the time horizon over which 
one looks. When the actuaries make projections for 75 years 
into the future, they have shown a picture that I have seen in 
testimonies about the relative payment rates to providers many, 
many decades into the future.
    The sorts of changes that are in train for the coming 
decade might affect access to care or quality of the care, as I 
have said, but would be much less severe in those effects than 
if those same policies were left in place for the remainder of 
the 75-year period that the actuaries make projections for. So, 
but beyond that, we just don't have a way of trying to quantify 
for you the extent of the impact on beneficiaries.
    Co-Chair Hensarling. Apparently, the trustees in CMS do so 
far. In an attempt to lead by example and follow the lead of my 
co-chair, I see my time is now ended.
    Thank you, Dr. Elmendorf.
    Dr. Elmendorf. Thank you.
    Chairman Murray. Representative Becerra?
    Representative Becerra. Dr. Elmendorf, thank you very much 
for your testimony, and you focused quite a bit of your time on 
what is coming up, which, if we are not careful, could be 
pretty bad.
    But we are dealing right now with a $14 trillion national 
debt plus--$14 trillion-plus national debt and fairly massive 
deficits today, and we have been charged to come up with 
savings from these current and past deficits of at least $1.5 
trillion.
    And so, let me ask that a few charts that I have, the first 
chart actually is a chart CBO's work done in 2001 that I would 
like to have raised. It is called ``Changes in CBO's Baseline 
Projections of the Surplus Since January 2001,'' and what I 
would like to do on that chart, if we can get that up, is just 
point out what was being projected by your office back in 2001 
and then analyze--and I think all my colleagues have copies of 
those charts with them--and analyze that.
    Now it is very difficult to make out these tables and make 
much sense of them. But for those who can make out the lines, 
the numbers on those charts, the very top line, the total 
surplus as projected in January----
    Senator Baucus. Xavier, could you tell us what page that is 
on?
    Representative Becerra. It should be a separate package 
that you got----
    Senator Baucus. Oh, it is a handout.
    Representative Becerra. It is a separate handout. That is 
correct. It should be----
    Dr. Elmendorf. I think this is a table that CBO has 
published and posted on its Web site, but it is not included in 
the testimony that I brought today.
    Representative Becerra. That is correct. And I only will 
make a couple of points here since it is difficult to read all 
the numbers on the table. But the first one is that the top 
line there, total surpluses as projected in January 2001, 
projected that after--from 2001 to 2011, if you totaled it up, 
we have surpluses of $5.610 trillion.
    And if you go down to the very bottom of the chart, towards 
the very bottom, to the line that says ``Actual Surplus or 
Deficit,'' under the year 2002 column, by the year 2002, there 
was a negative 158, which means a deficit of $158 billion.
    So that while the projections in 2001 were for record 
surpluses totaling over 10 or so years, $5.6 trillion, by the 
second year, by 2002, we were already beginning to run 
deficits, not surpluses. So we knew well in advance of the year 
2011 that the Federal Government was beginning to run 
deficits--in fact, record deficits--that could ultimately harm 
our economy.
    I have another chart that uses the data from the CBO that 
we just discussed and tries to put it in a little easier form 
to analyze. And the Pew Center did this chart, taking the data 
from the Congressional Budget Office to try to segment out 
where that change from surplus to deficit went. All those 
dollars that were spent, all the revenue through the tax code 
that was lost, where did it go?
    And obviously, the biggest piece of the pie on the right, 
technical and economic, that is what I think you described 
earlier as shortfall in Nation's output. In other words, all 
the things that have caused us to have less output than we had 
expected, projected. The recession and so forth probably 
constitutes the biggest portion of that.
    After that, the second biggest slice of the pie that drove 
our deficits, you can see, are the tax cuts in 2001 and 2002, 
the Bush tax cuts. Actually, you could put together our defense 
costs, which are here in the very bottom, ``Operations in Iraq 
and Afghanistan'' at 10 percent, and ``Other Defense 
Spending,'' a little bit further up to the left, at 5 percent, 
and you have 15 percent of the pie due to defense spending, and 
so on.
    And interestingly enough, increase in net interest, money 
we pay just on the interest we owe on that national debt, is 
one of the largest items as well. So nothing productive comes 
of making those payments.
    I raise all that because as we talk about where we should 
target our solutions, we should know what has driven us most 
towards these large annual deficits that now give us this over 
$14 trillion national debt.
    And the final chart that I wanted to raise because it also 
points out the actual discretionary spending part of the pie, 
which you spent some time on--not the tax expenditures, not the 
spending we do through the tax code, which is the largest 
portion, but through the allocations we make every year through 
the budgeting process, the appropriation process. Hard to tell 
again, unless you have a chart in your hand, but the largest 
item shows the change in spending from 2001 to 2010, the 
greatest percentage of that added spending in those 10 years 
was in the Department of Defense, much of it because of the war 
in Iraq and the war in Afghanistan. But fully two-thirds of the 
costs or the extra spending that was done from 2001 to now 2010 
has come in spending done in the Department of Defense.
    You could compare that to, say, the Veterans Department, 
Veterans Affairs Department. The share of the new spending over 
that 10-year period that went to veterans was about 5 percent. 
Education, you can see further down the list. The new spending 
beyond what was expected in 2001, it is about 1 percent.
    And I think that is important to sort of gauge that. And as 
much as I hope we have a chance to get into some of this and 
talk about where we have to go, I think it is important to know 
where we are coming from. And so, I thank you for being here to 
help us gauge those responses into the future.
    I yield back.
    Chairman Murray. Senator Kyl?
    Senator Kyl. Thank you, Madam Chairman.
    Rather than make a speech, which would probably have the 
effect of dividing us if I responded to my colleague, I would 
like to focus on areas where we might find agreement, going 
back to my opening statement, and to begin with a quotation 
from the President.
    In March of last year, he said, and I quote, ``It is 
estimated that improper payments cost taxpayers almost $100 
billion last year alone. If we created a Department of Improper 
Payments, it would actually be one of the biggest departments 
in our Government.''
    Well, this committee can address the question of improper 
payments, but I think we are going to need CBO's help in order 
to do that. For 2010, GAO estimated total improper payments at 
over $125 billion. And according to its report, Medicare, 
Medicaid, and unemployment insurance ranked 1, 2, and 3 in 
total improper payments. Their figures were slightly below 
those I quoted earlier.
    But the bottom line is that if you had $100 billion, as the 
President says, in overpayments each year, over a decade, that 
is $1 trillion. More than $1 trillion when you compound it. It 
is an area we need to address.
    And since it doesn't involve cuts in benefits or 
fundamental reform of programs--which I happen to think we 
should do, but I am trying to stay on areas where we can reach 
bipartisan consensus here--we are going to need help in scoring 
how to approach this.
    My first question I guess I should ask is do you agree, 
whether it is with these specific numbers or not, with the 
President's contention, let's just say, that at least there is 
a significant amount of inappropriate payment for some of the 
programs that I have mentioned?
    Dr. Elmendorf. So I agree with that. I have two quick 
comments. One is that there is a difference, of course, between 
improper payments and fraud. Fraud is a much narrower category 
involving certain legal issues.
    Some improper payments are simply that people didn't put 
Social Security numbers into forms where they should have or so 
on. And if the forms were filled out properly, the payments 
might be still made.
    So just people should understand that when they see some of 
these largest numbers for improper payments, that is a much 
broader set of situations than the sort of thing that we read 
of prosecutions regarding in the newspaper.
    Second point to make, of course, is not just whether the 
improperness or the fraud is out there, but what policy levers 
the Government has to go after that. Of course, those programs 
are not trying to encourage improper payments or fraud. There 
is an active effort on the part of the Justice Department, as 
well as the part of the departments running these programs, to 
crack down on fraud. And you do see stories in the newspaper 
about prosecutions.
    So the question that we can help the committee work on is 
what policy levers are available that can try to wring some of 
that money out of the system?
    Senator Kyl. Exactly so. And that is where we need your 
advice. And the comment about fraud is obviously correct. I 
think fraud is not the most significant part of these 
overpayments, but it is important.
    One question is would we benefit in a cost-benefit analysis 
by devoting more resources to trying to root that out? We 
should deal with that. Another would deal with whether or not 
hiring additional people to check before the check goes out 
rather than audit after we find the problem would be 
beneficial.
    The prompt payment requirements represent part of the 
challenge that we have here, as I understand it. So, now, is it 
true that CBO has--well, let me just ask, has CBO itself done 
an analysis of these numbers?
    Dr. Elmendorf. I don't have numbers comparable to the ones 
you quoted to use. But we do spend a fair amount of time 
working with Members of Congress, working with the people at 
CMS, and so on to think about ways that policies could be 
changed that would try to reduce the level of those payments.
    And as you know, the Budget Control Act, in fact, included 
provisions for raising the caps in discretionary spending to 
cover some of those increased efforts that you described.
    Senator Kyl. Right.
    Dr. Elmendorf. And we included in our estimate of the 
effects of that act the savings that we thought would accrue in 
terms of reduced payments.
    Senator Kyl. Well, just to summarize, will you work with us 
to try to help us identify the potential policy that could 
result in, on a cost-benefit analysis, significant savings if 
we were to implement it?
    Dr. Elmendorf. Yes. We certainly will. But can I just also 
caution, I am not against our working with you on any issue 
that you want us to work with you on, but there is no evidence 
that suggests that this sort of effort can represent a large 
share of the $1.2 trillion or $1.5 trillion or the larger 
numbers that some of you have discussed as being the objective 
in savings for this committee.
    Senator Kyl. Well, the GAO, if the GAO report is right, if 
what the President said is right, if there is over $100 billion 
in just 1 year alone, then even if we get 25 percent of that, 
it is a significant amount of money. It is at least something 
that I think on a bipartisan basis we can agree on because it 
doesn't involve fundamental reform of the program, it seems to 
me.
    Now there is a second area that I wanted raise here, too, 
and that is asset sales. There are a lot of different reports. 
CRS, for example, in 2009 said the Government held well over 
10,000 unneeded buildings, spending $134 million just to 
maintain them. The President's budget assumed savings by 
selling property and so on.
    One of the things we would also like to ask you to do, and 
I know you have scored the President's proposal, but that was a 
proposal that relied on incentives to sell property. If we 
simply mandated the sale of property, I think we would need 
your advice about how to structure that so that we would get 
the best return for the sales that we would want to accomplish.
    Will you work with us on that potential area of--that is 
revenue rather than savings, but it all amounts to the same 
thing in terms of helping us with our problem.
    Dr. Elmendorf. Yes, Senator. Of course, we will work with 
you. I would caution again. We have done a fair amount of work. 
We have given testimony on this topic, and there is no evidence 
that the amount of savings that could be--or extra revenue that 
could be reaped by the Government through efforts in this 
direction could represent any substantial share of numbers that 
begin with ``t'' for trillion.
    The Base Closure and Realignment effort has not yielded 
significant amounts of money for the Government in terms of 
selling the property. It saved money in terms of operating some 
of these facilities, but not much has been sold.
    When one sees these numbers of thousands of Government 
properties not being used, many of them by number are shacks in 
the middle of nowhere that don't have market value. And the 
properties that have the most value--there has been some back 
and forth I have seen in the newspapers about property in Los 
Angeles--then the people who live around it are fighting very 
hard to prevent the Federal Government from selling it.
    Not to discourage you from passing laws to the contrary. 
But what happens are the things that are most valuable is that 
the people who are there are using it or potentially using it 
or want the area to stay that way tend to push back very hard, 
and history suggests that very little money is actually reaped.
    But we are certainly ready to work with you on policies in 
that direction.
    Chairman Murray. Senator Baucus?
    Senator Baucus. Thank you, Senator Murray.
    Again, I want to follow up with Senator Kyl's questions. I 
think we should explore this much more vigorously than we have 
in the past, and I think you and I and others will try to work 
with you to try to find some solutions here.
    On the version I have of your statement, it is page 5. You 
are talking about the timing of deficit reduction, and you 
state that according to analysis, essentially, credible policy 
changes that would substantially reduce deficits later in the 
coming decade for the longer term, the thought being spending, 
cuts in spending are efficient, would both support economic 
expansion in the next few years and the strength of the economy 
longer term.
    My basic question is, could you give us some examples about 
how we could achieve both goals, namely jobs and deficit 
reduction? That is really one of the key questions here is how 
do we do this?
    There are probably several ways. You mentioned that deficit 
reduction has to be, in the longer term, credible because we 
can't do something that is not credible. It has to work, but we 
have to find the balance. And I wondered if you could give us a 
couple examples in how we accomplish that?
    Dr. Elmendorf. Well, there are a number of possibilities, 
Senator. We released a report in January of 2010 that analyzed 
a set of alternative proposals for spurring job growth. We 
looked at increased transfer payments. We looked at cuts in all 
sorts of different types of taxes. We looked at other types of 
Government spending increases.
    And I don't want to be appearing to steer the committee in 
any particular direction among those choices because the 
choices involve not just the effects on the economy--and we did 
estimate quantitatively the impact on output and employment. 
They also involve choices about what you want the Government to 
do, what sorts of activities it should be engaged in, what the 
role of the Government should be relative to the private 
sector.
    So the set of choices in making stimulative policy, in 
addition to doing deficit reduction policy, are far beyond our 
technical role. I think the crucial points, though, are that 
cuts in taxes or increases in spending in the near term will 
spur output and employment in the near term. But just by 
themselves, they will reduce output and incomes later on 
because of the extra debt that is accumulated.
    Senator Baucus. Right. I----
    Dr. Elmendorf. If one wants to also improve the medium and 
longer-term outlook for the economy, then one needs to have 
deficit reduction that offsets the extra costs in the near term 
and reduce the deficit further relative to the unsustainable 
path of current policies.
    Senator Baucus. I appreciate that. In fact, I think I have 
your chart, your table, that is entitled ``Estimated Effects of 
Policy Options on Output and Employment.'' And I applaud you 
for it because, according to that chart, you, for example, with 
respect to jobs as to cumulative effects on employment, in 
2010, '11, '10 to '15, you have highs and lows that you rate. 
You know, this creates more jobs than that.
    So you give us a sense of what--for example, increasing the 
aid to the unemployed is very high in terms of its economic 
effect and helping people without jobs, but also with respect 
to the economy and GDP. So I appreciate that, and I will work 
with you to try to find ways to address that.
    I would like to turn to another question, and that is I 
don't want to steal from my good friend Rob Portman. He can 
follow up a lot more. But it is sort of the baseline question. 
And you say that we can get to 61 percent of GDP in 2021 under 
current law. But I think most of us here in this room don't 
think that current law is very realistic. There are going to be 
changes, and you list some of the changes in your statement, 
namely, the tax cuts--2010 tax cuts, AMT indexed for inflation, 
Medicare payment rates, and so forth.
    And if we were to assume that those provisions are going to 
be extended as something called the current policy, that 
instead of trying to get--instead of $1.2 trillion as to 61 
percent of GDP in 2021, the figure I have is about $6.2 
trillion.
    Dr. Elmendorf. Yes. That is right. The cost of extending 
those expiring provisions amounts to about--including the 
interest cost that would result, amounts to about $5 trillion 
over the coming decade. So the choice of the Congress about 
those policies is much larger an impact potentially than the 
stated target deficit reduction of this committee.
    Senator Baucus. All right. So let's say we want to reduce 
the deficit by, what, 6.2--5 plus 1.2 is 6.2, let's say, for 
example.
    Dr. Elmendorf. Okay.
    Senator Baucus. What would the composition of that 
reduction be if we reduce the deficit somewhat in parallel, in 
tandem with proportion to the causes of the additional $5 
trillion? I guess it would just be----
    Dr. Elmendorf. Well, most of the extra $5 trillion under 
your scenario comes from a reduction in taxes. So if one wanted 
to offset that, that is what you are suggesting, then one would 
need to raise significant tax revenue through some other 
channel.
    I mean, I think I understand the purpose for this hearing 
of talking about the history of debt and how we got here. And I 
think you are extending that a bit into the future, looking at 
what policy changes would get us to a certain place. But I 
think really the fundamental question for you is not how we got 
here, but where you want the country to go. What role do you 
and your colleagues want the Government to play in the economy 
and the society?
    Senator Baucus. That is right.
    Dr. Elmendorf. And if you want a role that has benefit 
programs for older Americans like the ones we have had in the 
past and that operates the rest of the Government like the ones 
we have had in the past, then more tax revenue is needed than 
under current tax rates.
    On the other hand, if one wants those tax rates, then one 
has to make very significant changes in spending programs for 
older Americans or other aspects of how the Federal Government 
does its business.
    Senator Baucus. That is exactly right, and I don't want to 
take time here. But it is just really the question. Where do we 
want to go? And do we want to have AMT indexed, for example? Do 
we want to have SGR, the physicians payment rate? Do we want to 
increase taxes for middle-income Americans beginning 2013, or 
upper income, or not?
    I mean, these are basic questions we are going to have to 
ask ourselves, and they all have consequences, really. And the 
consequences if we want to do all that is what we just agreed 
on. Namely, it is a $5 trillion addition to our job here. But 
in addition, we have what the President is going to have us do 
with his jobs plan.
    Thank you.
    Dr. Elmendorf. Yes, Senator.
    Chairman Murray. Representative Upton?
    Representative Upton. Well, thank you again, Dr. Elmendorf.
    I want to underscore what our friend Mr. Kyl said about 
fraud and abuse. I mean, there is nothing more irritating to 
any of us here or certainly to our constituents, and any 
assistance that you could help us on that I know would be low-
hanging fruit in a major way for us to include as part of the 
package.
    Let me ask just an early question as to timing of this 
whole event. We are tasked to have a vote prior to November 
23rd. What is the timing--I mean, other than as soon as 
possible. What is the realistic date that truly we have to have 
our documentation submitted to you?
    I know sometimes a lot of our Members are frustrated trying 
to get a CBO score. I know that there is not a higher priority 
for you all to do this. But what is really the date that you 
are going to want the material so that we can complete the work 
by the statute?
    Dr. Elmendorf. As you know, Congressman, from your work on 
the Energy and Commerce Committee, in order to process----
    Representative Upton. Which would feed into the queue ahead 
of Ways and Means in terms of the committee----[Laughter.]
    Dr. Elmendorf. It is an iterative process in which we often 
see preliminary versions of ideas and offer some preliminary 
feedback. But if this committee intends to write legislation 
that would change entitlement programs in specific ways, that 
process usually takes weeks of drafting to make sure that the 
letters of the law that you are writing accomplish the policy 
objectives that you are setting out to accomplish.
    And as part of that drafting process is our estimating 
ultimately the effects of the letter of the law as it is being 
written. So it will take us at least a few weeks.
    I have a terrific set of colleagues who are incredibly 
talented and work unbelievably hard. But we need to do our jobs 
right, and that means not just pulling numbers out of the air. 
So we have said in discussions with some of the staff of the 
committee that, with all respect, your decisions really need to 
be mostly made by the beginning of November if you want to have 
real legislation and a cost estimate from CBO to go with that 
before you get to Thanksgiving.
    Representative Upton. Now I want to get a better 
understanding of some of the estimates of the cost impact to 
the Affordable Care Act. As we know, the bill increased taxes 
on some of our Nation's most innovative job creators, reduced 
Medicare spending significantly. The tax increases and Medicare 
cuts were traded to create three new entitlement programs, 
which have yet to take effect, and according to our staff's 
projections, which are based on your most recent baseline, 
those new entitlement programs will cost the Nation nearly $2 
trillion over the first 10 years from '14 to 2023.
    So, question one, have you all estimated the full 10-year 
costs for each of these entitlement programs, Medicaid, health 
coverage subsidies and the creation of the CLASS Act, for the 
'14 to '23 period when they are fully implemented?
    Dr. Elmendorf. No, Congressman. We have not.
    Representative Upton. Do you anticipate doing that at all?
    Dr. Elmendorf. No. As you know, we produced estimates for 
the 10-year period that was under consideration when the law 
was being considered, and then we provided a rougher sense of 
what we thought would happen in the second decade from that 
point in time.
    As the time moves forward and the budget window moves out, 
we will ultimately end up with a 10-year budget window that 
will be from 2014 to 2023. But even then, it is not obvious 
that we will have an estimate of the effects of that 
legislation by itself.
    Some pieces of that legislation create new institutions, 
new flows of money that didn't exist before, insurance 
exchanges and subsidies. And those lines of our cost estimate 
will, in some sense, become real flows of money at that point 
in time.
    But much else of that legislation made changes in existing 
programs, in payments through Medicare and so on. And we will 
never know for sure what money actually is flowing differently 
because of that piece of legislation . We will see flow for 
certain purposes through certain accounts, but isolating the 
effects of that legislation won't really be possible.
    The prescription drug benefit is one of the few pieces of 
legislation where we can look back at how we did. In a sense, 
that is because much of that legislation--not all, but much of 
it, the big part--created a whole new stream of money that 
would have been zero otherwise. So we can see the difference.
    But for most legislation that the Congress passes, one can 
never really go back and tell. That is the risk of our table 
that we gave to Congressman Becerra and others. One can never 
really go back and tell what happened. And so, the healthcare 
legislation will be like that at some point.
    Representative Upton. Well, if there is a way that you 
would take the percentage of GDP and try to match that up with 
the outyears and look at 9, 10, 11, 12 years out? Is that a 
thought that you might take up?
    Dr. Elmendorf. Well, so we did. So we can talk with you 
further, Congressman. We did do an estimate as the net effect 
of the law, the share of GDP over the second 10 years. And we 
talked in our estimates at the time about some of the bigger 
pieces of the legislation, things that were growing rapidly or 
growing more slowly or so on.
    That sort of calculation is not really possible to do on 
the level of little specific provisions. It is just too broad a 
brush we need to paint with at that horizon, given the 
uncertainty involved. But if there are other ways of looking at 
those pieces that would be helpful to you, we are happy to try 
to do that.
    I think we made very clear--I hope nobody is confused about 
this--that legislation created significant new entitlements 
that raise Federal outlays. It also made other reductions in 
outlays and raised revenues in ways that on balance we think 
and still think reduce budget deficits. But that was a net 
effect of very large changes with different signs, and that 
increases the uncertainty surrounding those estimates of the 
net effects.
    Representative Upton. Thank you.
    Chairman Murray. Thank you.
    Representative Clyburn?
    Representative Clyburn. Thank you very much, Madam Chair.
    Dr. Elmendorf, since we have been sitting here, we received 
notice that the Nation's poverty rate has increased to 15.1 
percent, up almost a full percentage point. Now back in, I 
think it was September 2010, in testimony before the Senate 
Budget Committee, you said this.
    ``Regarding structural changes, the end of the housing 
boom, and the recession have all induced a reshuffling of jobs 
among businesses, occupations, industries, and geographical 
areas. Those developments suggest that gains in employment in 
the next several years will rely more than usual on the 
creation of new jobs with different businesses in different 
industries and locations and requiring workers with different 
skills.''
    Do you still feel that to be true?
    Dr. Elmendorf. Yes, we do, Congressman. We think that much 
of the extra unemployment we are seeing now is what economists 
would call a cyclical response to a weakness in the demand for 
goods and services. But that some of the extra unemployment we 
see now is more what economists call a structural problem, 
which involves, importantly, the mismatches that we discussed 
in the passage you read, also relates to unemployment insurance 
benefits and other factors in the economy.
    We made a rough attempt to quantify those pieces in our 
August update. But the upshot of that is to say that we think 
there is an important piece of current unemployment that 
relates to this kind of structural mismatch that would--makes 
it harder for those people to go back to work, because it is 
not so much going back as it is going on to something else.
    Representative Clyburn. Then that means then your view is 
there is not much that can be done in the short term to attack 
this?
    Dr. Elmendorf. I wouldn't quite say that. It is 
challenging. I mean, I think what I would say is that the 
cyclical part of the unemployment, that part that is responsive 
to the weakness in demand for goods and services, can be 
addressed through aggregate economic policies.
    The people who are unemployed for structural reasons, in a 
sense, because of the sort of the thing that they knew how to 
do in the place that they live isn't being done there or 
anywhere anymore, that isn't amenable to broad macroeconomic 
policy. It might be responsive to certain types of more focused 
policies--training programs, for example.
    I think the broad brush summary of training programs is 
that it is hard to make them work, but not impossible. I don't 
want to suggest that. But I think it is just a different sort 
of policy that would need to be considered in order to help 
some of those people find new jobs, to help other people create 
the jobs that those people would be able to do.
    Representative Clyburn. Well, just let me say, to be 
certain, I am just as concerned as my good friend Senator Kyl 
is about fraud and abuse. I want to cull that out of the system 
as well as we possibly can.
    The problem I have, though, is that with these kinds of 
numbers and with what you have just laid out, it means that 
those in need are increasing rapidly. And the question then 
becomes if you look at the median family, household income 
declining 2.3 percent, that means that irrespective of what may 
be happening to people who may not be deserving of the 
assistance, there are increases occurring among the needy very 
rapidly, and we have not done anything to absorb that 
challenge.
    Dr. Elmendorf. Certainly right, Congressman, about the 
number of people who are hurting. One thing I would say is that 
the Federal budget automatically does some things for those 
people. Food stamp participation is up. A lot more money is 
flowing out that way. Unemployment insurance, even apart from 
extensions, will pay benefits to more people if more people are 
unemployed.
    So some of the automatic features of entitlement programs 
end up helping those people, but I don't want to suggest that 
that has inoculated them against the overall problems that they 
face.
    Representative Clyburn. That means our burden of doing 
smart cuts is greater than what it may appear just looking at 
the numbers. It means we really need to look into all of these 
programs and see exactly where cuts ought to be made rather 
than just dealing with a number.
    Thank you very much. I yield back.
    Dr. Elmendorf. Yes, Congressman.
    Chairman Murray. Senator Portman?
    Senator Portman. Thanks, Madam Chair.
    Building on what my colleague, Congressman Clyburn, just 
said and what Co-Chair Hensarling talked about earlier in terms 
of the impact of the deficit and debt on the economy, Dr. 
Elmendorf, have you got a reaction to the Rogoff and Reinhart 
study, which shows that once you are at 90 percent of gross 
debt, which we are already, that you have an impact on GDP, 
therefore on jobs, therefore on the kind of issues that 
Congressman Clyburn talked about?
    Dr. Elmendorf. So we are certainly familiar with that work, 
Senator. Carmen Reinhart is a member of our panel of economic 
advisers. We benefit from her expertise.
    I think the thing to note about the study, first of all, as 
it was said, is that they are looking at gross debt. So those 
are larger numbers than the numbers that you will see from me. 
We focus on debt held by the public.
    Senator Portman. Right.
    Dr. Elmendorf. The other thing to say is that they divided 
the world into buckets in a sense, different levels of debt. 
That doesn't prove that there is some particular tipping point 
at 90 percent. It says that above--but their evidence shows 
that above that level, economies tend not to do well.
    We just had an issue brief last year about the risk of a 
fiscal crisis, and in other things that we have written, that 
we don't think it is possible to identify a particular tipping 
point. But there is no doubt that as debt rises, risks of 
fiscal crises rise. The Federal Government loses the 
flexibility to respond to unexpected international developments 
or problems at home because of this looming debt.
    And we are, as I said, moving into territory that is 
unfamiliar to most developed countries for most of the last 
half century.
    Senator Portman. In fact, in looking around the world, and 
there is a recent report by Alberto Alesina of Harvard 
University showing that the most successful and pro-growth test 
of reduction took place in countries that relied chiefly on 
austerity programs, spending cuts. And nations that relied more 
on tax increases were less successful in reducing the deficits 
and had slower economic growth.
    Have you looked at some of these countries that have gone 
through the same process we are going through now, and what 
comment can you give us today on what we can learn from the 
experience of those countries? And maybe if you know about 
Professor Alesina's study?
    Dr. Elmendorf. So I do know Alberto's work. There have been 
a number of studies, as you know, looking at the international 
experience of countries that have faced fiscal crises and have 
undertaken austerity programs. The IMF looked at a very similar 
set of data to the work of Alberto and Silvia and came to a 
different conclusion, in fact. Their conclusion was that in 
countries that really set out to do fiscal austerity, the 
results tended to not be good in the short term.
    I think the principal lesson of looking at countries like 
Greece and others is that it is a terrible situation to end up 
in, where one has to make drastic, abrupt changes in policy. 
But if you look at Greece or Ireland or the experience in the 
UK, which did not face such a crisis but has made a very 
determined pivot in its policy, those economies are not doing 
very well right now.
    And I think leaders in those countries felt they had no 
alternative, given where they had gotten to, that they were at 
a point where people were not lending the governments money 
anymore or were about to stop lending them money, in the view 
of the governments. So they had to make drastic changes. But 
that is not a situation that we would like to find ourselves in 
as a country.
    Senator Portman. It appears as though we are heading there 
if you look at the current policy baseline and some of the more 
realistic assumptions that my colleague, Senator Baucus, talked 
about. If you look at your chart with regard to baselines, you 
say that we have about a $3.5 trillion deficit increase over 
the decade under the current law baseline, but under current 
policy that you have, you say it is about $8.5 trillion.
    I would add tax extenders in there like the R&D tax credit 
and others, and possibly, you are up to about $9.3 trillion.
    Dr. Elmendorf. Yes.
    Senator Portman. So, again, the $1.5 trillion is a 
relatively small part of the problem. It is about 17.5 percent, 
by the way, of your $8.5 trillion number. So I do think that as 
we look at our work, we are going to need your help on looking 
at more realistic baselines. We are making very difficult 
choices on things like alternative minimum tax, SGR, and ending 
the UI extension and payroll tax and so on.
    In terms of what drives that, your Figure 14, I think, is 
very instructive, which talks about the major healthcare 
programs. Earlier, there was discussion about President Obama's 
comments. ``The major driver of our long-term liabilities,'' he 
said, ``everybody here knows is Medicare and Medicaid and our 
healthcare spending. Nothing comes close.''
    Assuming you agree with that, which I assume you do?
    Dr. Elmendorf. Yes.
    Senator Portman. What do you think ought to be the primary 
focus of this committee?
    Dr. Elmendorf. Again, Senator, it is really not the place 
of me or CBO to offer recommendations about how to proceed. But 
there is no doubt that the aspect of the budget that is starkly 
different in the future relative to what we have experienced in 
the past 40 years is spending on programs for older Americans 
and spending on healthcare.
    And the reasons those programs are so much more expensive 
in the future is partly due to changes in policy over time, but 
most importantly due to a greatly increased number of older 
Americans and higher cost for healthcare. As a matter of 
arithmetic, it is possible to raise taxes or carve away at the 
rest of the Government in a way that can support those programs 
in this form for some time, but there should be no illusion 
about the magnitude of the changes required in other policies 
to accommodate that.
    If one really leaves those programs in place, then, in 
fact, under current law already the rest of the Government 
would be much smaller relative to the size of the economy in 
2021 than it has been historically. And one would need to raise 
revenues substantially.
    I mean, this is a 5 percent of GDP increase in the cost of 
Social Security and major healthcare programs in 2021, relative 
to the 40-year average. Five percent of GDP is a very big 
number, and that is why I think many people believe that there 
should be changes in that part of the budget.
    Senator Portman. So if the 22.7 percent of GDP is spending 
in that 2021 estimate under, again, current law and not even 
current policy, the major driver is Social Security and major 
healthcare programs. That is as compared to the historic 
average the last 50 years of about 20.8 percent.
    Revenues there go from 18 percent historic average up to 
20.9 percent. My understanding is even under current policy, 
revenues go up above the 18 percent level. So your $8.2 
trillion----
    Dr. Elmendorf. A little bit.
    Senator Portman [continuing]. Or the $9.3 trillion, which 
is I think a more realistic estimate, also includes a slight 
increase in revenues, is that correct, as a percent of GDP?
    Dr. Elmendorf. I think a slight increase. Yes. That is 
right, Senator.
    Senator Portman. Twenty-two percent, I think, is the 
number.
    Dr. Elmendorf. I am not sure exactly. But, yes, a slight 
increase.
    I would just add one fact here. The number of Americans 
over the age of 65 is going to rise by about one third in the 
coming decade. One third more beneficiaries of Social Security 
and Medicare a decade from now, roughly, than there are today. 
And on top of that, with higher healthcare costs per person, 
one can see why these programs in their current form are 
becoming much more expensive over time.
    Senator Portman. Thank you.
    Chairman Murray. Senator Kerry?
    Senator Kerry. Thank you, Madam Chairman.
    Dr. Elmendorf, I want to try to move through a couple of 
things fairly quickly, if we can. You said a moment ago that 
the aspect of the budget that is starkly different is, I think 
you said, the number of older Americans and the cost of 
healthcare. Is that correct?
    Dr. Elmendorf. Yes. That is right.
    Senator Kerry. And those are the two things that you said 
are starkly different about the aspect of the budget today?
    Dr. Elmendorf. Today, and in the future. Yes, even more so 
in the future.
    Senator Kerry. But isn't it accurate that we have balanced 
the budget I think since World War II five times, and that each 
time we have balanced the budget, revenues have been somewhere 
between 19 and 21 plus percent of GDP? Is that accurate?
    Dr. Elmendorf. That sounds right, Senator. I have not 
checked exactly.
    Senator Kerry. And assuming that is accurate, we are 
currently at 15 percent, 15.3 I think is your prediction for 
this year, of revenues to GDP. Correct?
    Dr. Elmendorf. Yes. That is right.
    Senator Kerry. So isn't it fair to say that, in fact, there 
is an aspect about our budget today that is starkly different, 
which is the level of revenues relative to GDP. It is starkly 
different, isn't it?
    Dr. Elmendorf. Yes. That is right, Senator.
    Senator Kerry. And it is starkly different in that it is 
well lower than the historical average of when we balanced the 
budget or not balanced the budget?
    Dr. Elmendorf. Yes. That is right.
    Senator Kerry. So let me ask you, given that reality and 
given the reality that you and others--I think last year, the 
Committee on Fiscal Future of the United States, which was a 
joint effort of the National Academy of Sciences and the 
National Academy of Public Administration--developed four 
budget scenarios.
    They had one budget scenario where you had nothing but 
cuts, another budget scenario where you had nothing but tax 
increase, and then two in between. The only way they could keep 
the revenues at the historical average and keep the spending at 
a decent level was basically with cuts. But that doesn't get 
you where you need to go in terms of some of this historical 
average and not winding up with major, major cuts in terms of 
the benefits of Medicare or Medicaid.
    So if you want to avoid--you made the statement to us a 
moment ago that we have to make a decision about what we want 
to do. Most people have accepted that we don't want to have 
major reductions to--we have reforms, yes. We need to do a 
better job of making them fiscally sound. But I haven't heard 
anybody stand up on either side of the aisle and say there 
ought to be huge cuts in benefits.
    If that is true, then aren't we forced into a situation 
where we look somewhere near the historical norm with respect 
to the revenue to GDP percentage?
    Dr. Elmendorf. So if one wants to leave spending on Social 
Security and the major healthcare programs roughly in line with 
what would happen under current law, then one needs to either 
further carve away at all the other functions of the 
Government, or one needs to raise revenues above their 
historical average share of GDP by a significant amount, or one 
could do combinations of those.
    But there is no way to simultaneously let Social Security 
and the major healthcare programs grow the way they would under 
current policies or anything close to that and operate the rest 
of the Federal Government in line with its role in the economy 
over the past 40 years and keep revenues the same share of GDP 
they have been on average in the past 40 years. And the reason 
those things are inconsistent, even though they worked in the 
past 40 years, is because the number of people who will be 
older and the number who will be--and the amount they will be 
collecting in health benefits will be so much larger in the 
future than in the past.
    Senator Kerry. Well, I happen to agree with that judgment 
that you have made, and I think it is a very important one with 
respect to how we approach this.
    I also want to--we are going to obviously have some time 
here to discuss the healthcare piece, but isn't it true that, 
well, the Medicare excess cost growth, how does that compare to 
the excess cost growth in overall healthcare spending over the 
next decade?
    I think in recent estimates that you found that Medicare in 
the excess cost growth was actually lower than the historical 
average now. Isn't that true?
    Dr. Elmendorf. Yes. So excess cost growth, meaning not 
necessarily excessive in the judgmental sense, but just faster 
growth in benefits per person than in the growth of GDP per 
person, that sort of excess cost growth in Medicare under 
current law is pretty close to zero for the coming decade. That 
would be a very sharp change from the experience of the past 40 
years.
    Senator Kerry. And what do----
    Dr. Elmendorf. In relation to the discussion we had earlier 
about payment rates to providers.
    Senator Kerry. So what do we attribute that significant 
reduction in the Medicare cost growth rate?
    Dr. Elmendorf. So importantly, to features of the law, like 
the cuts in payment rates to physicians due to take effect the 
end of this year and like a number of the other cuts to 
provider payments enacted in last year's major health 
legislation.
    Senator Kerry. So that has had a beneficial effect in terms 
of restraining growth in Medicare--in Medicare cost?
    Dr. Elmendorf. Yes. That is right.
    Senator Kerry. Thank you. I will reserve my time at this 
point.
    Chairman Murray. Representative Camp?
    Representative Camp. Well, thank you.
    Director Elmendorf, I am sure you remember, as last year 
you testified before the President's National Commission on 
Fiscal Responsibility and Reform on a topic very similar to 
what you are covering today. It seems as if your presentation 
then said, then and now, that we need to get control of the 
automatic spending increases that have been built into the 
Government's budget. Is that a fair statement of your testimony 
then and now?
    Dr. Elmendorf. Well, again, I think we said that those 
pieces are growing very rapidly and that to accommodate that, 
as it stands, would require very large changes in other aspects 
of the money the Government spends or collects.
    Representative Camp. Those are the significant drivers of 
our current situation.
    Dr. Elmendorf. Yes.
    Representative Camp. So what programs in particular are at 
the core of CBO's projections for the long-term Government 
spending? And which programs are responsible for the largest 
increases in Government spending?
    Dr. Elmendorf. So if one looks at Figure 12 from the 
written testimony on page 39, and coming up on the screen for 
those with very good eyesight, one can see that this picture 
shows growth over the next decade in Social Security and in 
Medicare and in other major healthcare programs.
    Representative Camp. Do the other major healthcare programs 
include all of the Healthcare Act, long-term care and other 
Medicaid increases?
    Dr. Elmendorf. So the other major healthcare programs are 
Medicaid, the Children's Health Insurance Program, and 
subsidies through insurance exchanges, and some related smaller 
spending.
    Representative Camp. And the long-term care entitlement?
    Dr. Elmendorf. The long-term care entitlement, as you 
recall, actually raises money for the Government in the first 
decade of its life. And I don't know if that has been netted 
out here or not. I don't think so, actually, Congressman.
    But one can see from this picture that the largest increase 
as a share of GDP over the coming decade among these three 
categories is the other major healthcare programs, followed by 
Social Security and Medicare.
    Representative Camp. All right.
    Dr. Elmendorf. And that is principally, I think, because of 
a great increase in the number of beneficiaries from the 
expansions enacted last year and continued sharp increases in 
costs for beneficiaries in those programs.
    Representative Camp. In your prepared testimony before the 
President's commission, you also included a chart, which--if we 
could pull that up now, and everyone has a copy of this chart 
at their desk in their packet--which showed real GDP per capita 
under different economic conditions. You will notice under the 
alternative fiscal scenario, the line stops between 2025 and 
2030.
    And you explained then that that line stops because 
economic growth collapses and that it simply can't handle debt 
loads that high. Is that an accurate statement of what you 
testified before the President's commission?
    Dr. Elmendorf. Yes. That is right. We have updated this 
picture in our long-term projections from this year. But 
similarly, Congressman, not at quite the same point, the amount 
of debt under this alternative scenario becomes so large that 
our models don't know what to do with it.
    I don't think the economy would actually get that far at 
all because the people in the economy will be looking ahead and 
foreseeing what is happening. I think, in fact, much more 
serious problems will come sooner than we show in these 
pictures.
    Representative Camp. And I think you said that the 
Government debt has become so high that you don't know what to 
do with it because private investment ceases to function and 
the economy ceases to function under that scenario. Is that 
correct?
    Dr. Elmendorf. Ceases to function at some point. Again, I 
think that the freezing up would probably come sooner than we 
show in those pictures because of an anticipation of that 
problem.
    Representative Camp. And I think that analysis really does 
go along with what other analysts have said of the country's 
debt-to-GDP ratio when it exceeds 90 percent, and I am talking 
total debt to GDP ratio, that it reduces economic growth, as 
others have said in their time, by about 1 percent at that 
level.
    Dr. Elmendorf. Yes. I think the models that we are using 
here are consistent with a consensus approach to estimating 
this sort of issue.
    Representative Camp. And am I correct to say that our total 
debt-to-GDP ratio is over 90 percent at this time?
    Dr. Elmendorf. Yes. I think that is right, Congressman.
    Representative Camp. And what impact do you think these 
massive levels of debt relative to GDP have on the economy in 
general and specifically on the prospects for job creation?
    Dr. Elmendorf. Those levels of debt are a burden on the 
economy. They reduce our output and our incomes relative to 
what we would enjoy if we had done less borrowing and had done 
more saving.
    Representative Camp. This committee has been tasked under 
the Budget Control Act with finding $1.5 trillion in deficit 
reduction over a 10-year period. What is the size of the 
economy over the next 10 years?
    Dr. Elmendorf. So GDP today is about $15 trillion. We think 
it grows over the course of the coming 10 years. If you have 
done that calculation, Congressman, I would be happy to hear 
the number from you.
    Representative Camp. Well, just assuming over 10 years, 
$150 trillion, we are talking about 1 percent of our economy, 
are we not, in terms of rough numbers?
    And the reason I want to point out this number is you 
mentioned the impact of us making decisions about spending that 
might have impacts on the economy, and I just want to put in 
perspective, over the next 10 years, these reductions in debt 
that we are asked to find over the next 10 years roughly 
represent about 1 percent of the economy. And I am talking very 
rough numbers.
    Dr. Elmendorf. So I think that sounds about right to me, 
Congressman. And I agree that the problem is very large by the 
standards of the incremental fiscal policy decisions that the 
Congress normally makes. But it should not be viewed as 
unsolvable. Changes in policy can put us on a different path.
    Representative Camp. And in terms of outlays, I think this 
amount over the next 10 years represents about 3 percent of our 
outlays, and as I think Senator Portman mentioned as well. And 
so, I think we need to put it in perspective that while I am 
not underplaying how difficult this might be, but in terms of 
impacting the economic trajectory of the United States economy, 
we are not over the next 10-year period in significant 
percentages of either economy or outlays. Most families and 
businesses have had to do with less than 3 percent, and I think 
it is something over a 10-year period, they have obviously had 
to do with less than that.
    Dr. Elmendorf. Yes.
    Representative Camp. And just lastly, I realize my time has 
expired. I do want to just ask you one quick thing.
    We may come to agreement on impacts within the 10-year 
budget window, but we may have decisions that are outside of 
the 10-year budget window. And I just wanted to ask if you 
would be willing to work with us to find ways to measure the 
impact of policies outside the traditional budget window and if 
you would commit to helping us do that?
    Dr. Elmendorf. Yes. Absolutely, Congressman.
    Representative Camp. Thank you very much, and I yield back.
    Chairman Murray. Representative Van Hollen?
    Representative Van Hollen. Thank you, Madam Chairman.
    Let me just start, Dr. Elmendorf, by thanking you for your 
testimony and just say that--and this goes for Republicans and 
Democrats alike--we are all entitled to our own opinions, but 
not to our own facts. And the last time that our budget was 
balanced was back in the 2001, 2000 time period. And in fact, 
during that time, revenues as a percent of GDP was 20.6 percent 
in the year 2000 and 19.5 percent in the year 2001.
    And the last time spending was 18 percent of GDP was about 
1967, and it has risen since then largely because we, as a 
nation, decided to make sure that older Americans in their 
retirement had the health security they needed. So it is 
important to keep those facts in mind as we go forward.
    Now you posed a very fundamental question to this 
committee, and let me ask you this. If we were to try and 
continue with current retirement and healthcare, security 
programs in the future, we would need significant changes to 
revenue beyond current law, would we not, in order to fund them 
and balance our budget, assuming we kept the rest of Government 
constant?
    Dr. Elmendorf. Yes. That is right, Congressman.
    Representative Van Hollen. And if we were to try to 
preserve those--let me ask you this. If we were to continue 
current revenue policy without any changes, it would require 
very deep cuts to those retirement and security programs, would 
it not, if we were to try and bring down the deficit?
    Dr. Elmendorf. If you also maintain the rest of the 
Government in accordance with its historical pattern, yes, 
Congressman.
    Representative Van Hollen. That is right. And as you 
pointed out in your testimony, in fact, over the next 10 years 
as a percent of GDP, that is going down, is it not?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. Okay. So that is the fundamental 
question, and I think we recognize that we have to deal with 
the outyear issues. We have a demographic challenge. We have 
more and more people retiring. But as you just pointed out, if 
we want to avoid huge cuts to Medicare and to Social Security, 
we also have to deal with the revenue piece. In other words, we 
have to increase revenues beyond current policy if we want to 
avoid very deep cuts.
    So I think it is important that we look at the revenue side 
of the equation right now, and you have presented that to us in 
your testimony. And I think it is time for this committee to 
get real and recognize that, yes, there are spending issues, 
especially in the outyears, but there is also a revenue issue.
    Now, as you point out, under current law, the 10-year 
cumulative deficit is $3.4 trillion. Correct? Under current 
law.
    Dr. Elmendorf. I think it is a $3.5 trillion.
    Representative Van Hollen. Three and a half trillion 
dollars?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. And as you point out on page 19 
of your testimony, if we continue current tax policy and the 
current physician payments under Medicare, that will rise from 
$3.4 trillion to over $8.5 trillion. That is there in your 
testimony.
    Dr. Elmendorf. Yes.
    Representative Van Hollen. Now you mentioned those two 
factors together, but I think it is important to point out that 
of that over $5 trillion, that the huge bulk of it has to do 
with continuing current tax policy, does it not?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. And in fact, by my calculation, 
you get just under $4 trillion on revenue. And if you add the 
debt service associated with that, you are talking about $4.5 
trillion of your $5 trillion dealing with current revenue 
policy. Is that right?
    Dr. Elmendorf. Yes. That is right.
    Representative Van Hollen. So, just to be clear, if this 
committee were to adjourn today and the Congress were to 
adjourn for the next 10 years and go away, we would actually 
achieve greater deficit reduction than if we went, took the 
Simpson-Bowles advice and went big. Is that not right?
    In other words, we would get over $4 trillion over that 10-
year period, even if we fixed the doctor, physician 
reimbursement piece, right?
    Dr. Elmendorf. So if--let me make sure I have this right. 
If you extended those expiring tax provisions----
    Representative Van Hollen. That is right.
    Dr. Elmendorf [continuing]. And indexed the AMT for 
inflation----
    Representative Van Hollen. Yes.
    Dr. Elmendorf [continuing]. Then that would add to deficits 
by $4.5 trillion or so. That would be larger than the amount of 
savings if this committee stayed----
    Representative Van Hollen. It is simple math, right? It 
would be more than the $4 trillion that a lot of people talked 
about, right?
    Dr. Elmendorf. Yes. That is right.
    Representative Van Hollen. Okay. So I think it is 
important, as we look at this challenge, to look at both sides 
of the equation there. And what we are talking about, just so 
we can translate this into what the American people have 
experienced, what we would be talking about is essentially 
going back to the same tax rates and tax policy that was in 
effect during the Clinton administration, a period of time when 
20 million jobs were created and the economy booming.
    Now I am not suggesting we go back to that particular tax 
policy, but if you look at Simpson-Bowles compared to current 
law, they provide about a $2 trillion tax cut compared to 
current law, as opposed to $4 trillion. If you look at Rivlin-
Domenici, they propose about a $1 trillion tax cut compared to 
current law, approximation.
    So if we are really going to address this challenge, let's 
recognize that if we don't deal with the revenue piece, as Dr. 
Elmendorf said, you are talking about dramatic cuts to health 
and retirement security for America's seniors. We have to take 
a balanced approach. That is why the other bipartisan groups 
took that kind of approach.
    Thank you, Madam Chairman.
    Chairman Murray. Senator Toomey?
    Senator Toomey. Thank you, Madam Chairman.
    Since my colleagues have raised this issue, I just want to 
touch on a couple of things that didn't quite make it into the 
conversation so far. Isn't it true that as recently as 2007 the 
current tax rate structure yielded revenue that was about 18.5 
percent of GDP?
    Dr. Elmendorf. I think that is right, Senator. Yes. The 
current level, of course, is very low because the economy is 
very weak.
    Senator Toomey. Exactly. And the main reason that total 
revenue as a percentage of GDP is so much lower than the 
historical levels is because we have an economy that is still 
effectively in a recession, very high unemployment, very weak, 
lack of growth. Isn't that right?
    Dr. Elmendorf. Yes. That is right.
    Senator Toomey. And as recently as 2007, the deficit that 
we had that year was about, if I remember correctly, less than 
1.5 percent of GDP, I believe. And if we could get to the point 
where we consistently had deficits of 1.5 percent of GDP, then 
our debt as a percentage of our economy would clearly be 
declining, and we would have, to a very large extent, solved 
this problem, if not completely.
    Dr. Elmendorf. Yes. That is right. If you could--yes. That 
is right.
    Senator Toomey. To the level of the deficit that we had in 
2007, with the current tax rates. Let me ask a couple of other 
questions, if I could?
    You went through, and I don't think there is any dispute 
that excessive debt has all kinds of negative implications--we 
all acknowledge that--including the possibility that we get to 
the point where you have a financial crisis, an economic 
freezing up.
    Isn't it true that it is essentially impossible to know 
precisely when you get to that point?
    Dr. Elmendorf. Absolutely.
    Senator Toomey. So it is just not knowable?
    Dr. Elmendorf. I think it is just not knowable.
    Senator Toomey. Right. Isn't there a danger that the 
magnitude of the debt is already impeding economic growth, 
having a chilling effect on investment and risk taking? Isn't 
that possible?
    Dr. Elmendorf. I think the level of debt is probably 
weighing on economic activity. All things equal, of course, we 
wish we had less.
    Senator Toomey. Right.
    Dr. Elmendorf. I think the question is how to proceed from 
here.
    Senator Toomey. I guess the point I want to make is given 
that it is probably already weighing on economic growth and 
given that we acknowledge that continuing down this path 
eventually leads to a full-blown crisis and we can't know when, 
that suggests to me that it is very dangerous to delay making 
meaningful reform. And while there is some concern that curbing 
the size of the deficit in the short run impedes economic 
growth, I would argue that it is already happening.
    And if we--if the future promised reductions in the deficit 
either weren't credible or at some point became less credible, 
then we could discover we are already in that territory where 
the financial crisis could emerge. Isn't that a danger that we 
would run in delaying this?
    Dr. Elmendorf. I think there are disadvantages to delay, 
Senator, as we said in the written testimony and as I repeated 
here. Again, based on our analysis, which I think is consistent 
with a consensus of professional opinion, immediate increases 
in taxes or cuts in spending would slow the economic recovery. 
But that is not meant to imply that there aren't a variety of 
factors that can matter in different ways, not meant to imply 
that we are sure we have that right.
    But that is, I think, the consensus of professional 
opinion.
    Senator Toomey. It might be, but there certainly is an 
alternative point of view about that, especially with regard to 
the spending side.
    Dr. Elmendorf. Yes, Senator. That is right.
    Senator Toomey. And even though you and I might disagree on 
this debate somewhat, I am sure you would agree that when it 
comes to its impact on economic growth, not all Government 
spending is equal.
    Dr. Elmendorf. That is absolutely right.
    Senator Toomey. Spending in your models would generate more 
rather than less. Similarly, not all tax cuts are comparable, 
right?
    Dr. Elmendorf. Exactly.
    Senator Toomey. Some encourage economic growth more than 
others?
    Dr. Elmendorf. Exactly.
    Senator Toomey. And in fact, crudely speaking and broadly 
speaking, that spending and tax cuts, while they may 
arithmetically have the same impact on the deficit if you 
assume they have no other implications, in fact, they do have 
other implications?
    Dr. Elmendorf. That is right. And when we do economic 
modeling of the consequences of alternative fiscal policies, we 
try to capture that. We incorporate the level of marginal tax 
rates on labor and capital and those effects on work and on 
saving.
    Senator Toomey. Right. And on page 33 of your testimony, 
you observe that lower marginal rates enhance the incentive to 
work and save and invest, and that has a pro-growth feedback on 
the economy.
    One of the things we haven't discussed, but I would like 
your reflection on, is the possibility of a revenue-neutral tax 
reform that simplifies the code, broadens the base, and lowers 
marginal rates. Wouldn't that tend to enhance growth and, 
therefore, enhance revenue to the Government?
    Dr. Elmendorf. Yes. That is right, Senator. The magnitude 
of that effect, of course, depends on the specifics of the 
policies that would be enacted.
    Senator Toomey. Right. And so, I wonder if you have a rule 
of thumb that you could share with us. For instance, for a 
given incremental increase in the rate of growth on average, 
what kind of impact does that have on the deficit over an 
extended period of time?
    Dr. Elmendorf. Well, so we offer our rules of thumb for 
that in the back of our annual Budget and Economic Outlooks. 
And the magnitude of that effect I will offer to you in one 
moment.
    Senator Toomey. A figure that comes to mind, and maybe you 
could confirm or refute, is that a 0.1 percent of additional 
growth on average sustained over 10 years is roughly $300 
billion in additional revenue? Is that about----
    Dr. Elmendorf. Yes. That is just right.
    Senator Toomey. So a full percent, I mean, this may not be 
perfectly linear, but it certainly goes in the same direction?
    Dr. Elmendorf. Yes. It almost certainly isn't perfectly 
linear, and we offer these rules of thumb for small changes 
because we are just not sure what else might happen with very 
large----
    Senator Toomey. The point is a small, sustained change in 
growth has a huge impact on the deficit or reducing the 
deficit. Would you agree with that?
    Dr. Elmendorf. Yes. That is right.
    Senator Toomey. Thank you.
    Thank you, Madam Chairman.
    Chairman Murray. I thank you very much. And we have gotten 
through our first round here, and I appreciate everybody 
keeping it concise.
    I am going to have to use the prerogative of my chair to 
make a small change at this time. The House is going to be 
having votes at approximately 1 p.m. There are 12 of us, and 
the time is very short. So unless somebody throws something at 
me, I am going to limit each of us to 2 minutes in the final 
round and would ask everybody to please keep it to that 
timeframe.
    Dr. Elmendorf, let me just ask, as you have been talking 
about, in the long-term budget report from January, CBO 
included an analysis on the impact of lower than expected 
economic growth on the Federal budget. I wanted to ask you, 
what does CBO estimate is the impact on the deficit projections 
in the near term and over the next 10 years if GDP growth 
continues to weaken beyond what is reflected in the current 
estimates?
    Dr. Elmendorf. So, certainly, a weaker economy implies 
worse budget outcomes, primarily because tax revenues fall. 
Also because there is some extra spending in some of the 
entitlement programs that we talked about a moment ago.
    We have not done quantitative estimates of budget outcomes 
for other particular scenarios beyond what is in these rules of 
thumb that we have offered in our volume in January. And the 
rules of thumb are rough because a lot of things can or may not 
rise and fall with the rest of the economy.
    We have been surprised in the past few years at some of the 
outcomes of tax revenue even given the state of the economy. 
But there is no doubt that a weaker economy is worse for the 
budget and a stronger economy is a lot better for the budget. 
The challenge is how to move the economy, and it is not easy to 
move a $15 trillion economy.
    Chairman Murray. Thank you.
    I do have a question about sequestration. I am going to 
submit it for the record because I do think it is important. As 
hard as the choices we are looking at here, we need to 
understand the impact of that, and I appreciate the information 
you have put out on that.
    But the significant impacts to sequestration I think need 
to be understood by our committee as well. So I will submit 
that for the record.
    Dr. Elmendorf. I will be happy to answer it, Senator.
    Chairman Murray. And reserve my time and turn it over to 
Mr. Hensarling.
    Co-Chair Hensarling. Dr. Elmendorf, I think it was Senator 
Kerry who brought up that revenues today are roughly at 14 
percent of GDP. Doesn't your latest budget estimate under a 
current policy baseline show that revenues go back to their 
historic norm of 18 percent of GDP in 2014?
    Dr. Elmendorf. Yes. That is right, Congressman. They are a 
little over 15 percent today, and the improvement in the 
economy and other underlying factors in the tax code we think 
will push that up to a little over 18 percent under current 
policy.
    Co-Chair Hensarling. Your alternative fiscal scenario, 
which is a current policy baseline, also shows spending going 
from a historic average of roughly 20.5 percent up to 34 
percent of GDP. Is that correct?
    Dr. Elmendorf. That sounds about right, Congressman.
    Co-Chair Hensarling. So is it fair to say that with respect 
to revenues, one is episodic related to the lack of economic 
recovery, the other is structural. Is that a fair assessment?
    Dr. Elmendorf. Yes. Both factors are at work right now, 
Congressman, and----
    Co-Chair Hensarling. Let me continue on there. Those who 
have advocated or have brought up that historically when the 
budget has been balanced, taxes have gone beyond their historic 
norm of roughly 18 percent of GDP to closer to 20 percent of 
GDP. And again, this is your alternative fiscal scenario shows 
that spending by 2035 goes up to 33.9 percent, and the same 
alternative fiscal scenario shows that taxes already on a path 
to increase from 18 percent of GDP to 18.4.
    So following the analysis of those who advocate that in 
order to achieve a balanced budget that revenues have to come 
up from what you say they are already rising, from 18.4 to, 
say, 20 percent of GDP, wouldn't the analysis also suggest 
under a balanced approach that spending has to decrease 
essentially 14 percentage points under your alternative fiscal 
scenario to reach its historic norm?
    Dr. Elmendorf. So, Congressman, I would rather not parse 
the meaning of the word ``balance,'' given its role, apparent 
role in your discussions. But you are right that if revenues 
were at 20 percent of GDP, then balancing the budget, given the 
assumptions, it would require a reduction in spending.
    Co-Chair Hensarling. Thank you.
    Chairman Murray. Representative Becerra?
    Representative Becerra. Dr. Elmendorf, I think I am going 
to start calling you ``Sergeant Friday.'' You are here 
essentially giving us at least your best interpretation of the 
facts, and we appreciate that because you are not trying to 
give us opinion. You are not telling us whether in 5 years or 
10 years we should reduce the benefits we give to seniors under 
Medicare or make a change to our defense and security needs.
    You are simply telling us what the numbers show and leaving 
it to us as policymakers to come up with a good mix. And I 
appreciate that. I suspect your mother or father or your 
grandmother or grandfather are probably also pleased that you 
are just talking numbers and not saying what should be done to 
them with regard to Medicare or Social Security or anything 
else.
    One quick point, with regard to the discussion of our long-
term costs, you mentioned Medicare and Social Security and 
Medicaid. Medicare and Medicaid, because they deal with 
healthcare and healthcare costs, are in a different boat than 
Social Security, are they not, in terms of their long-term 
costs?
    Dr. Elmendorf. Yes. That is right. The increases in 
spending for those programs that we project under current law 
are a lot greater over time than for Social Security.
    Representative Becerra. And indeed, Social Security, by 
about 2028, 2030, starts to stabilize and stays pretty constant 
in terms of its cost to the Federal Government into the 
outyears, right?
    Dr. Elmendorf. Yes. Roughly so. After the baby boom 
generation has primarily retired, that line roughly levels out.
    Representative Becerra. And because you are dealing with 
facts, you are not here to tell us about how to make that fix 
to healthcare because the reality is that Medicare and Medicaid 
are simply reimbursement or financing systems. If we were to 
just cut benefits for a senior, that doesn't necessarily mean 
that their healthcare cost will drop. That shifts the cost more 
into the pocket of the senior to pay for that care if Medicare 
just reduces what it reimburses?
    Dr. Elmendorf. I think it depends on the policy, of course. 
But there are some policies that shift cost, and there may be 
some policies that reduce overall costs.
    Representative Becerra. Thanks, Sergeant Friday. Appreciate 
it.
    Dr. Elmendorf. Thank you, Congressman.
    Chairman Murray. Senator Kyl?
    Senator Kyl. Thank you, Dr. Elmendorf.
    Just one question in the interest of time here. While I 
know you agreed with Senator Toomey's observation that there is 
another point of view or other points of view, regarding your 
argument that cuts in spending now can harm economic growth or 
delay economic recovery, that is true of defense spending as 
much as other spending. Is that not correct?
    Dr. Elmendorf. It is true of potentially all types of 
spending. There may be differences across types, but I think 
that is a more subtle distinction.
    Senator Kyl. Yes. And here, with defense, for example, you 
have high unemployment of returning veterans to begin with. You 
have the reduction in end strength. You have more people 
potentially unemployed. You have people making radios and 
building ships and so on. And if those cuts, therefore, end up 
reducing the employment in those industries and the amount of 
money spent in those areas, obviously, it could delay economic 
recovery.
    Dr. Elmendorf. Yes. That is right, Senator.
    Senator Kyl. Thank you.
    Chairman Murray. Senator Baucus?
    Senator Baucus. Thank you, Madam Chairman.
    I wondered, Dr. Elmendorf, if you could just again, we 
discussed a little bit of it already, what changes either let's 
say in tax policy will stimulate the economy most, if you could 
rank them somehow?
    Dr. Elmendorf. Well, as it turns out, in the table which 
you are looking, Senator, from our January 2010 report, we did 
consider the effects of a set of alternative tax cuts. We have 
not updated this table since that point. If we did, I think the 
numbers would be slightly different, but probably not 
fundamentally different.
    Reductions in payroll taxes that we studied here were among 
the more powerful levers, followed by expensing of investment 
costs, and then followed below that by a little bit by broader 
reductions in income taxes. And the reason for that difference 
is principally that the money that is saved by employers or 
employees in payroll taxes we think translates into a fairly 
comparatively large amount of incremental spending. And also in 
the case of a cut to what employers pay amounts to at least a 
temporary discount on the cost of hiring workers.
    Senator Baucus. Let me change subjects. If we have a 
revenue-neutral tax reform, corporate or individual, and the 
tax reform, let's say, on the individual side is dramatic, 
broaden the base, lowering the rate, et cetera, how much growth 
would result from a very simplified tax code along those lines?
    Dr. Elmendorf. A tax code with a broader base and lower 
rates would spur economic growth, but the magnitude is 
something we would have to take specific proposals from you 
back to our models and work hard on them for a while before we 
could hazard any sort of quantitative estimate.
    Senator Baucus. Okay. Thank you.
    Dr. Elmendorf. Thank you, Senator.
    Chairman Murray. Representative Upton?
    Representative Upton. Thank you.
    I am concerned about the impact of the Affordable Care Act 
on job creation. Can you provide us a detailed explanation of 
the methodology used to calculate how many employers will 
actually drop their healthcare coverage for their employees?
    Dr. Elmendorf. I can provide a brief summary in the next 
minute and three-quarters, Congressman. We have a model of 
health insurance coverage in which employees and employers are 
trying to obtain coverage at low cost, but also giving weight 
to the quality of the coverage they receive.
    In our analysis, the Affordable Care Act encourages some 
employers to provide insurance coverage who would not have 
otherwise because of the mandate for insurance coverage and 
some of the subsidies. On the other hand, it encourages other 
employers who would have offered coverage not to offer any 
more. And we think that latter effect outweighs the former, and 
we have a small reduction in employer-sponsored insurance 
coverage.
    Our estimates are very consistent with the estimates of 
other people, with large-scale models like those at the Urban 
Institute. Obviously, there is a tremendous amount of 
uncertainty around those estimates, and there have been some 
surveys that have suggested there would be more employer 
dropping.
    At this point, based on the things that we have seen since 
we did those estimates, we are comfortable those estimates make 
sense. But it is an issue where we have been asked to explore 
the sensitivity of the budgetary effects to alternative 
outcomes in terms of employer-sponsored insurance coverage, and 
we are working on those estimates now.
    Representative Upton. Could you actually provide us maybe a 
dial-up? I don't know what your percentage is. I thought it was 
like as low as 5 percent or less?
    Dr. Elmendorf. It is a small percentage. I am not exactly 
sure.
    Representative Upton. Yes. And I wonder if you could 
provide us an estimate, if it was maybe 10 or 20 percent?
    Dr. Elmendorf. So the challenge we have is that it matters 
a lot for budgetary cost who ends up with and without employer-
sponsored health insurance coverage. So we can't really do just 
a scaling up in that sense. We have to understand in the model, 
and there are ways to change the assumptions in the model to 
give different answers. But we need to do that because that 
will affect the budgetary cost.
    It is also not obvious that the budgetary cost is as large 
as it may seem at first. If people are not getting employer-
sponsored coverage and move to the exchanges, they will pay--
the Government will pay more for their coverage. On the other 
hand, the employers will have extra money that they were 
previously using to buy health insurance with. Most economists 
think that money will turn up as wages for workers. They will 
pay taxes on that.
    If it doesn't, it will turn up as additional corporate 
profits, and they will pay tax on that. So the overall 
budgetary effects will depend on the combination of changes in 
exchange subsidies, in Medicaid costs, and in tax receipts. But 
we are working on that, Congressman.
    Representative Upton. Thank you.
    Chairman Murray. Thank you.
    Representative Clyburn?
    Representative Clyburn. Thank you, Madam Chair.
    Dr. Elmendorf, let me look at revenue from a different 
perspective here. Is it fair to say that the decrease--or the 
increase in unemployment has decreased revenue going into the 
Federal coffers?
    Dr. Elmendorf. Yes. That is right, Congressman.
    Representative Clyburn. If we had a decrease in 
unemployment of just, say, 0.5 percent--from 9.1 to 8.6--what 
would be the level of revenue increase?
    Dr. Elmendorf. I can't do that in my head, Congressman. It 
would help, but I don't know. And it would help partly because 
we would pay less unemployment insurance benefits and partly 
because of people who are earning money would pay taxes on 
those earnings.
    Representative Clyburn. So it is a double whammy.
    Dr. Elmendorf. Both sides of the budget would be affected.
    Representative Clyburn. I would like to see some computer 
printout.
    Dr. Elmendorf. I will task my computer with that 
assignment, Congressman.
    Representative Clyburn. I appreciate it. Thank you.
    Chairman Murray. Senator Portman?
    Senator Portman. I think Congressman Clyburn has just made 
a great point, which is the economy plays such a huge role 
here. And since this is a hearing about the history of how we 
got here, I have gone back and looked at your May 12, 2011, 
report, which talked about earlier 32 percent of the difference 
between a $5.6 trillion surplus projected and the $6.2 trillion 
deficit, which is an $11.8 trillion swing, 32 percent of that 
is because of the economy.
    And about 33 percent of it is new spending. About a third 
of that spending is for global war on terror--Iraq, 
Afghanistan, and other spending on the war on terror. It is 
about 39 percent is due to new spending when you add the 6 
percent that is the stimulus.
    Fifteen percent is the Bush tax cut. By the way, over 70 
percent of that went to those making less than $250,000 a year. 
And then the rest is interest and the AMT and the rebates in 
2008.
    So I think it is a great point that the economy is going to 
drive so much of this. And we talked about this earlier, but 
you said that you thought that increasing taxes at this point 
would have a negative impact, just as you thought that certain 
spending cuts would have a negative impact on economic growth 
and jobs.
    But then, in response to Senator Baucus, you said that some 
tax reform, particularly lowering the rates, broadening the 
base, would have a positive economic impact. Can you briefly 
speak to that as it relates to the corporate tax code and the 
possibility also of lowering the rate to make the U.S. more 
competitive?
    Dr. Elmendorf. So I think that in terms of both the 
individual income tax and the corporate income tax, economists 
widely agree that lower tax rates and broader base would be 
good for the economy both because the lower rates would reduce 
the disincentive to worker to save and also because broadening 
the base itself can, if done in certain ways, reduce the 
incentives for misallocating capital resources.
    Again, to actually estimate the effects on the economy, we 
or our colleagues at the staff of the Joint Committee on 
Taxation would need to have specific proposals and would need 
to spend some time trying to model those. It is a very 
complicated business, as you know, Senator.
    Senator Portman. How long would it take you?
    Dr. Elmendorf. I will not commit to that. Offhand, if we 
have proposals from you, we will work on them as fast as we 
possibly can. I will certainly promise you that.
    Senator Portman. And prioritize them, right?
    Dr. Elmendorf. We are giving very high priority to the work 
of this committee, Senator.
    Senator Portman. Thank you, Madam Chair.
    Chairman Murray. Senator Kerry?
    Senator Kerry. There is a big distinction, is there not, 
almost obvious, Dr. Elmendorf, if 98 percent of America was 
getting a tax cut and 2 percent, who happen to be the 
wealthiest people whose decisions are very different and whose 
impact on the economy is very different, there is a big 
difference in that versus sort of a blanket discussion of all 
of the tax cut versus none. Correct?
    Dr. Elmendorf. In terms of the economic effects, yes, 
Senator.
    Senator Kerry. Yes.
    Dr. Elmendorf. We think that is right.
    Senator Kerry. And I think that is part of the modeling 
that needs to be done here because I think that distinction 
will be very telling in a lot of ways.
    What I want to ask is I think it would be helpful to all of 
us on the committee, I have great respect for the Rogoff-
Reinhart analysis. In fact, I suggested we might get them in 
here, and I think it is an important one. But, and here is the 
``but,'' and I would like you to draw the distinction for us.
    Your analyses and much of our discussion centers around the 
public debt. The public debt is 62 percent, I believe, of GDP. 
But we have had a number of references here to the gross debt, 
which obviously includes all of the trust funds and so forth, 
where there is a very different impact because of the full 
faith and credit of the United States and printing and so 
forth.
    Help us understand how that distinction might play out in 
our deliberations, particularly with respect to the impact on 
interest rates. I think the public debt has far more impact on 
interest rates than on the economic judgments, does it not? So 
maybe you can just educate us a little bit on that distinction 
between them.
    Dr. Elmendorf. Yes, Senator. So CBO focuses on debt held by 
the public because we think that is a better measure of the 
impact of Federal borrowing on financial markets today than 
gross debt. Of course, any snapshot of what the Government owes 
at a point in time will be very incomplete without looking at 
where the fiscal trajectory is going, and that is why we always 
combine our reporting on current levels of debt held by the 
public with projections of revenues and spending. And 
certainly, financial markets are very attentive not just to the 
current amount of debt, but also to the amount of debt they 
would expect the Government to be trying to get them to buy in 
years ahead.
    But our view is that debt held by the public, together with 
these projections for the future, offers you and your 
colleagues a fairly complete, by no means perfect, but a fairly 
complete picture of the Federal budget situation.
    Gross debt, which, as you said, includes money, includes 
bonds held by various Government trust funds, we think does not 
really measure the amount of--does not measure the amount of 
debt that the private financial system has been asked to absorb 
today, nor is it a very good measure of what will happen in the 
future because for some programs, the amount of debt held in 
those trust funds is a lot less than the amount that they will 
need to pay benefits under current law. In other cases, the 
amount of debt held in the trust funds doesn't actually 
correspond to future spending. So we just don't think that is 
the most useful measure.
    Now in the work that Carmen Reinhart and Ken Rogoff did, 
they viewed that as the best available measure for the set of 
countries over the period of time that they have done this 
analysis for. And I don't want to put words in their mouth, but 
we have discussed this issue with Carmen.
    And, but I think in our case, because we do these very 
elaborate projections on a very detailed level of the budget, 
that combining those projections with debt held by the public 
gives you and your colleagues the best sense of where this 
country stands today.
    Senator Kerry. Thank you.
    Chairman Murray. And Representative Camp?
    Representative Camp. Thank you very much.
    I just wanted to point out that as part of the fiscal 
commission, I researched how often Federal revenues exceeded 20 
percent of GDP in the history of our country, and we found they 
have only done it three times since--in the history of our 
country--in 1944, in 1945, and 2000.
    And in 2000, they were 20.6 percent of GDP revenues, and 
that was really largely due to the threefold increase in 
capital gains from $40 billion in 1999 to $12 billion--or $121 
billion in 2000. So that was what drove that.
    Is that and----
    Dr. Elmendorf. I think that is right, Congressman.
    Representative Camp. Thank you.
    And in the 11 fiscal years since 1940, we have had surplus 
revenues for 4 of those years between 19 and 20 percent, and 
for 7 of those years, they were less than 19 percent of GDP.
    So I have a letter that outlines all of this that I would 
like to submit for the record. And I just think it is important 
to point out that, again, during the 12 years in which the 
budget was in surplus, outlays never exceeded 19.4 percent of 
GDP, and I think it is important to keep those revenue levels 
in historical perspective.
    Chairman Murray. Representative Van Hollen?
    Representative Van Hollen. Thank you, Madam Chairman.
    I would again point out that the last time Federal spending 
was around 18 percent of GDP or lower was about 1967. We made a 
decision in this country to provide for health security for 
seniors. So we have really got to look at that period of time 
since then if we want to continue that commitment, including 
what years the budget was in balance, which was in 2000-2001 
period.
    Look, Dr. Elmendorf, I think you have made a very good 
point in your testimony. I know you are not making 
recommendations, but I think your testimony was clear that you 
can't address the deficit challenge without modernizing the 
health security programs, unless you have large increases in 
taxes above even current law. But unless you change current tax 
policy, you can't address the deficit situation without deep 
cuts in health security programs.
    Now I just want to have a quick question. You mentioned 
that there are some tax policies that generate more economic 
activity, some that generate less. You mentioned the payroll 
tax holiday is one that generated relatively more than some of 
the others because more money in people's pockets.
    Isn't it also true that with respect to spending programs, 
there are some that generate more activity than others in the 
economy and that investments in the area of infrastructure and 
education provide for economic growth? Isn't that also the 
case?
    Dr. Elmendorf. Yes. But just give me one moment to say that 
I want to be careful about the pieces of the budget. There are 
revenues. There is Social Security and the major healthcare 
programs on my chart, and there is the rest of the budget. And 
I don't think you disagree with this, Congressman.
    But the thing that is not possible to do is to maintain 
Social Security and the major healthcare programs in their 
current state and maintain the rest of the Federal Government 
at the same share relative to the size of the economy it has 
been in the past and maintain revenues at their historical 
average share of GDP.
    Representative Van Hollen. Right.
    Dr. Elmendorf. One needs to move at least one. One could 
also choose to move any two or three of those as you choose. 
What is not possible, as a matter of arithmetic, given the 
aging of population and rising healthcare costs, is to have all 
three of those pieces look like they looked historically.
    And different policies on the spending side do have 
different effects in economic growth, and they do at different 
horizons. So some policies might be more effective this year or 
next. Others might be more effective over longer periods of 
time, and we can try to provide that sort of information to you 
and others if you are interested in that.
    Representative Van Hollen. I appreciate that, Dr. 
Elmendorf. I am just making the point that both tax policies, 
as well as investment, spending policies, both can have 
positive economic impact. Is that right?
    Dr. Elmendorf. Yes. That is right.
    Representative Van Hollen. Thank you.
    Chairman Murray. Senator Toomey?
    Senator Toomey. Thanks, Madam Chairman.
    Dr. Elmendorf, one of the challenges that we face is how we 
can address these challenges in a credible way, right? How, for 
instance, willing will future Congresses be to abide by 
spending caps or other kinds of reductions or disciplines that 
we might try to impose? And of course, we cannot tie the hands 
of future Congresses.
    So I wonder if you might reflect on ways that we could 
maximize the chances that future--that spending restraints that 
we would hope to achieve would, in fact, come to pass, whether 
that would be through strengthening existing budget enforcement 
mechanisms, creating new ones, or other ways that we might do 
that.
    Dr. Elmendorf. I think, Senator, the most effective way to 
ensure that changes you discuss today actually become--take 
effect later is to enact those changes into law today. 
Enforcement procedures are only a backstop. Ultimately, the 
Congress will need to enact changes in the legislation 
governing certain programs or provisions to the tax code if it 
wants to make those changes.
    And if specific changes are enacted into law this year, 
then I think there is a much greater chance that they will take 
effect when the time comes than if what is enacted into law 
this year is simply a set of objectives for total amounts of 
spending or total amounts of taxes or other sorts of 
benchmarks.
    Senator Toomey. So structural reforms in a program are 
likely to have more enduring results than long-term caps 
designated. Would you agree with that?
    Dr. Elmendorf. Yes, I think that is right. And I think we 
have seen that historically. The original Gramm-Rudman 
legislation, Gramm-Rudman-Hollings, was cast aside because the 
overall target that it set for the deficit proved to be 
impossible to meet. Whereas the provisions of the early 1990s, 
the PAYGO provisions that tried to make it more difficult for 
the Congress to make deficits worse, seem, to most observers, 
to have been at least somewhat effective during the period when 
the Congress was very concerned about budget deficits.
    So I think it is the important aspect of this for both the 
long-term effects and also for the shorter-term effects in 
terms of people believing the deficits will be smaller in the 
future comes from specificity in putting provisions into law 
today, even if they are timed to take effect, for various 
different reasons, at different points in the future.
    Senator Toomey. Thank you.
    Chairman Murray. Thank you very much.
    I want to thank all of our committee members for being so 
accommodating. Dr. Elmendorf, certainly, for your input and 
your staff's input for today as well.
    I want to remind all of our members that they have 3 
business days to submit questions for the record, and I hope 
that the witness can respond quickly to that.
    Dr. Elmendorf. Yes, we will.
    Chairman Murray. Great. Thank you.
    And members should submit their questions by the close of 
business on Friday, September 16th.
    [The information follows:]
    Chairman Murray. Without objection, the joint committee 
stands now adjourned.
    [Whereupon, at 1:10 p.m., the committee was adjourned.]


                       OVERVIEW: REVENUE OPTIONS 
                       AND REFORMING THE TAX CODE

                              ----------                              


                      THURSDAY, SEPTEMBER 22, 2011

                        United States Congress,    
                                 Joint Select Committee    
                                      on Deficit Reduction,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:08 a.m., in Room 
2123, Rayburn House Office Building, Hon. Jeb Hensarling [co-
chairman of the joint committee] presiding.
    Present: Representatives Hensarling, Becerra, Camp, 
Clyburn, Upton, and Van Hollen.
    Senators Murray, Baucus, Kerry, Kyl, Portman, and Toomey.
    Chairman Hensarling. The committee will come to order.
    One of the preliminary announcements, the chair wishes to 
again remind our guests that any manifestation of approval or 
disapproval, including the use of signs or placards, is a 
violation of the rules which govern this committee; and the 
chair wishes to thank our guests in advance for their 
cooperation and compliance.
    Today's hearing of the Joint Select Committee on Deficit 
Reduction is entitled Revenue Options and Reforming the Tax 
Code. We want to welcome our witness, Dr. Tom Barthold, the 
Chief of Staff for the Joint Committee on Taxation.
    Dr. Barthold, thank you for your time. Thank you for your 
service. We look forward to your testimony. I suppose, more 
precisely, testimonies.
    We may have set a Congressional first today with two panels 
and one witness. We will have our first testimony by our 
witness on business tax reform. There will be a round of 
questions by our members. Then we will have a second testimony 
by our witness on individual tax reform.
    Members of the joint committee have agreed to limit opening 
statements to those of the two co-chairs. So at this time I 
will recognize myself for an opening statement.

OPENING STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE 
  FROM TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Chairman Hensarling. In last week's testimony regarding the 
drivers of our structural debt, we heard Congressional Budget 
Office Director Doug Elmendorf say that, although government 
revenues are certainly temporarily down, he expects them to 
again reach their historic norm of a little over 18 percent of 
GDP in short order. However, he reminded us that spending is 
due to explode to over 34 percent of GDP in the years to come, 
that principally driven by entitlement spending programs, some 
of which are growing at two, three, and four times the expected 
rate of growth of our economy.
    As I have maintained since the first meeting of the Joint 
Select Committee, there are many actions that this committee 
can take that would be helpful in addressing our structural 
debt crisis. However, we simply cannot and will not succeed 
unless our primary focus is about saving and reforming social 
safety net programs that are not only beginning to fail, many 
of their beneficiaries but simultaneously going broke. If we 
fail to do this and choose to solely or primarily address our 
debt crisis by increasing the Nation's tax burden, I fear the 
consequences.
    Former CBO Director Rudy Penner, in testimony before the 
Simpson-Bowles Commission, of which a number of us serve, 
stated, ``the U.S. total tax burden, which is considerably 
below the OECD average, would be higher than today's OECD 
average by mid-century; and within a few years after that we 
would be the highest taxed nation on Earth.''
    Also appearing before Simpson-Bowles was former CBO 
Director and current Social Security and Medicare trustee 
Robert Reischauer, who stated, ``the longer we delay, the 
greater risk of catastrophic economic consequences. The 
magnitude of the required adjustments is so large that raising 
taxes on the richer corporations, closing tax loopholes, 
eliminating wasteful or low-priority programs and prohibiting 
earmarks simply won't be enough.''
    Finally, when he served as CBO Director, Dr. Peter Orszag, 
in a letter to Budget Committee Chairman Paul Ryan, stated, 
``the tax rate for the lowest tax bracket would have to be 
increased from 10 percent to 25 percent. The tax rate on 
incomes in the current 25 percent bracket would have to be 
increased to 63 percent. And the tax rate of the highest 
bracket would have to be raised from 35 percent to 88 percent. 
The top corporate income tax rate would also increase from 35 
percent to 88 percent.''
    So the ability, wisdom, and consequences of addressing our 
debt crisis through tax increases will continue to constitute a 
rigorous debate by our committee. My hope, though, is that we 
may be able to achieve rigorous agreement that fundamental tax 
reform, even just limited to American businesses, can result in 
both revenue from economic growth for the Federal Government 
and more jobs for the American people. Seemingly, both the 
President of the United States and the Speaker of the House 
agree.
    Most Americans agree that there is something fundamentally 
wrong with our Tax Code when a small business in east Texas 
pays 35 percent and a large Fortune 500 company pays little or 
nothing. There is also something fundamentally wrong with our 
Tax Code when an American company pays 35 percent and its chief 
European competitor only pays 25 percent. We should seize the 
opportunity and correct this for the sake of both bringing in 
more revenues for economic growth and addressing our jobs 
crisis at the same time.
    At this time, I will recognize my co-chair, Senator Patty 
Murray, for her opening statement.
    [The prepared statement of Chairman Hensarling appears in 
the appendix.]

  OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM 
  WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Co-Chair Murray. Well, thank you very much, Co-Chairman 
Hensarling; and I want to thank our witness, Thomas Barthold, 
for taking the time to be here today, as well as all of our 
colleagues and the members of the public and the audience that 
are watching on television.
    We all know the American people are looking at this 
committee with great optimism but also with real skepticism. 
They have heard the partisan rhetoric that has dominated our 
Nation's capital recently; and, quite frankly, they are tired 
of it. When it comes to this committee and its work, they don't 
care how it impacts one party's fortune versus the other. They 
don't care how it impacts one special interest versus another. 
Their only question to us is how will it impact their life. 
They want to know if we can help their spouse or family member 
or neighbor get back to work. They want to know if we can make 
a real dent in the deficit so their children are able to 
compete and succeed and can it be done in time for families 
that are losing faith with each passing day.
    Answering those questions is going to take honesty from 
every member of this committee, honesty with one another and 
honesty with the American people about what it is going to 
take. It is going to mean looking at every part of our budget 
and realizing that there is spending that has grown too fast, 
job investments that still need to be made, entitlements that 
are expanding too quickly, and a Tax Code that has become 
riddled with corporate giveaways and special interest carve-
outs for the richest Americans. But more than anything else it 
is going to take the shared realization that solving our 
deficit crisis and putting Americans back to work will mean 
taking a truly balanced approach.
    Now, to this point, in Congress we have begun the process 
of addressing spending. In fact, the Budget Control Act that 
established this committee cut more than $1 trillion from our 
National deficit, and that was on top of caps to appropriations 
bills that had already been put in place.
    But as the overwhelming majority of American families and 
economists and every serious bipartisan commission that has 
examined this issue has agreed spending cuts alone are not 
going to put Americans back to work or put our budget back in 
balance. We have to address both spending and revenue.
    So I am looking forward to hearing from Mr. Barthold about 
the tax reforms and revenue this committee can explore. I am 
interested in hearing about the loopholes and tax expenditures 
my colleagues on both sides of the aisle have agreed are too 
often wasteful and market distorting but are options for 
broadening the base and lowering the rate, boosting the economy 
and bringing in additional revenue and about keeping our Tax 
Code truly progressive.
    Revenue and the Tax Code is just one side of the ledger, 
but it is an important one, and it needs to be part of a 
balanced and bipartisan plan we owe it to Americans to come 
together on this committee and pass. I am pleased this 
committee has begun the hard work of negotiations over the last 
few weeks, and I am hopeful that we can come together and 
deliver the results that Americans deserve: a balanced plan 
that helps get our economy back on track, gives businesses the 
stability to hire again, and ensures that middle-class families 
and the most vulnerable are not bearing the burden of balancing 
our budget alone.
    Thank you very much.
    [The prepared statement of Co-Chair Murray appears in the 
appendix.]
    Chairman Hensarling. I thank my co-chair; and at this time, 
Dr. Barthold, I wish to yield to you for your testimony on 
business tax reform. You are recognized.

    STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT 
                     COMMITTEE ON TAXATION

    Mr. Barthold. Thank you, Mr. Hensarling, Ms. Murray, and 
members of the Joint Select Committee. I thought I would use 
the time on this first panel to try and give you a very brief 
overview of the Federal tax system with an emphasis on business 
taxation under our system. My submitted testimony provides 
substantially more detail than, of course, I will be able to go 
into here.
    I am going to concentrate on just a packet of slides that 
has been placed at each of your chairs.
    If you turn to the first page of that, Figure 1 really just 
tells you that the Federal revenue system in the United States 
is comprised of five tax sources, of which the individual 
income tax is the largest, the payroll taxes are the second, 
corporate income tax is the third largest component, followed 
by a series of excise taxes and the estate and gift tax.
    Figure 2 then documents for you that in fact this has been 
the case. This has been the basic structure of the U.S. tax 
system for many, many, many, many years. The one broad trend 
that you will see in Figure 2 is that employment taxes have 
grown in importance largely with the expansion of the Social 
Security system through--over the decades and Medicare, and the 
importance of the corporate income tax has declined since the 
post-World War II era.
    Figure 3 really just documents I think a point that Co-
Chairman Hensarling made that Doug Elmendorf presented to you a 
week ago, and this is sort of the history of Federal receipts 
as a percentage of the economy.
    Looking over the next decade, there is some significant 
changes in the tax system scheduled to occur with the 
expiration of many current tax provisions after 2011 and then 
again after the close of 2012; and Figure 4 shows you projected 
revenues by source, the increasing revenues from the individual 
income tax, the payroll tax, and the corporate income tax, et 
cetera, for the debt next decade.
    And just to scale that to the economy, Figure 7 provides 
the same information scaled to GDP.
    Now, these prior charts that I have turned through very 
quickly divided the tax world into an individual income tax and 
a corporate income tax. But I think it is important for us to 
recognize that many business enterprises in the United States 
are not C-corporations, and so that means they are not subject 
to the corporate income tax. And in fact a significant amount 
of business income is taxed directly to the individual return.
    And so what Figure 6 shows you is just the number of 
business entity types and how it has changed over the past 40 
years or so, with Figure 7 providing particular detail on the 
growth of S-corporations and partnerships in comparison to C-
corporations over the past 30 some years. As you can see in 
Figure 7, these pass-through entities, these alternative 
business forms, this includes State-chartered LLCs with which I 
know many of you are aware from your constituents, have become 
increasingly important in terms of the number of business 
entities.
    But it is not just number of entities, of course, when we 
look at the tax system. It is the amount of revenue. And Figure 
8 gives you a very quick look at the growth of net income 
reported by these entities and reported by C-corporations, 
again over the last 30 years. What this chart shows is the 
relative growth of non-C-corporate business income as a 
percentage of GDP.
    The same information is really sort of emphasized in the 
projections that we are making for the coming decade. When you 
look at Figure 9, we project that the sum of income reported to 
sole proprietorships, to S-corporations and partnerships and 
other pass-through business forms will grow by 80 percent over 
the coming decade, comprising a larger and larger share of 
taxpayers' adjusted gross income.
    Now, that said, it is also important to have a very good--I 
guess it will be very brief in this case--overview of how we 
tax business income in the United States. And the rules for 
taxing business income, whether it be through an S-corporation 
or a C-corporation, are really essentially the same. We look at 
the gross income of the enterprise less allowable deductions.
    Allowable deductions include all ordinary and necessary 
business expenses such as salaries and wages, the fringe 
benefits for such things as retirement and health and other 
fringe benefits that employers provide employees, the cost of 
raw materials, advertising expenses, and an important expense 
for many business enterprises is the deduction for interest 
expense for borrowed capital. It is probably important to note 
in this case that interest expense is deductible to businesses, 
but dividend payments, another form in which capital invested 
is rewarded, is not deductible.
    We provide rules for cost recovery for long-lived assets, 
referred to as the modified accelerated capital recost system 
makers. In other words, it accounts for the depreciation, the 
economic loss in value from long-lived assets.
    Now, in addition, currently, there is a special deduction 
related to domestic production activities. This has the effect 
of lowering the effective tax rate on qualifying activities. 
Taxes on business income apply to the U.S. taxpayer's worldwide 
income wherever it is earned, but certain active income earned 
abroad may have its tax deferred until the income earned abroad 
is repatriated to the United States.
    Currently, the top rate of tax for C-corporations, which 
applies to almost all large corporations, so just about any 
corporate name you can think of, the statutory rate is 35 
percent. There are smaller--there are lower tax rates for 
smaller levels of income.
    If you turn to Figure 12 in the packet before you it shows 
you a brief history of corporate income tax rates, and so you 
can see the 35 percent rate. The number inside the little 
bubble tells you the income level at which that rate becomes 
applicable, and so you can see both the bracket level as well 
as the rate and how that has changed since the mid-1970s.
    Now, the co-chairman asked me to take a couple of moments 
and introduce the concept of tax expenditures and how they 
might be important, both in the context of business income and 
the individual income tax. The detailed presentation provides a 
large list and shows you some of the evolution of tax 
expenditures through time. Just to be clear, the notion of a 
tax expenditure is relative to sort of a theoretically pure 
income tax, what might be considered a special exclusion, a 
special rate, a special credit, or a special deduction.
    And Table 5, the next page in your packet, shows you the 
largest tax expenditures as calculated by my staff colleagues 
for corporations encompassing the period 2010. We are 
projecting over 2010 to 2014, and you can see the 10 largest 
tax expenditure items are an estimate of those items.
    One point I would like to note is that, although this list, 
this top 10 list, when you look in the detailed presentation, 
has changed over time, two items have been in the list of top 
10 expenditures every time we have done the analysis since 
1975, and that is some form of accelerated depreciation and the 
exclusion of interest on general purpose State and local debt 
held by business entities.
    It has also been the case that the reduced rates for 
smaller levels of corporate income have been a feature of our 
tax expenditure analysis and our corporate tax system every 
year since the early 1980s. And generally also since the early 
1980s one of the largest tax expenditures has always been 
either a deduction or a tax credit or you can take the sum of 
the two for research expenses.
    I think at this point I have probably given you a very, 
very quick and rough overview, but it is probably time for me 
to turn it over to the committee so that you can ask specific 
questions, and I would be happy to answer any question.
    Thank you very much.
    [The prepared statement of Mr. Barthold appears in the 
appendix.]
    Chairman Hensarling. Thank you, Dr. Barthold, and we look 
forward to your second testimony as well.
    The co-chair will yield to himself for the first round of 
questions.
    On your Figure 3, Federal receipts as a percentage of GDP--
as I understand it we, unfortunately, do not have these slides 
for our monitors--but what I appear to see is a chart that 
tells me that essentially since World War II that our Federal 
receipts as a percentage of GDP have been somewhere between 15 
and 20 percent; and, as I understand it, the average is about 
18, 18\1/2\ of GDP in the post-war era?
    Mr. Barthold. That is correct. Since 1950, the average is 
actually 17.9 percent; and since 1971 the average has been 18 
percent. So it has been----
    Chairman Hensarling. Okay. So roughly 18 percent, and it 
has operated within a fairly, I guess, relatively speaking, 
narrow band.
    It is also my understanding that during this same time 
period that we have seen marginal rates go as low as 28 percent 
and as high as perhaps 90 percent perhaps in the late 1950s, 
early 1960s, is that correct?
    Mr. Barthold. You are referring to the rates of the--the 
top rate.
    Chairman Hensarling. The top marginal bracket in the 
income.
    Mr. Barthold. And I actually have a--I think I have a nice 
picture of that for the second panel. But, yes, sir, you are 
correct.
    Coming out of World War II and then during the Korean War, 
the top marginal Federal tax rate on the individual income 
tax--and this applied to ordinary income. There was a special 
treatment of income from the sale of capital assets--but was as 
high as 90 percent. It was then reduced to 70 percent in the 
Kennedy round of tax cuts in the early 1960s. The marginal tax 
rate individual income then was reduced further. In the mid-
1970s, we made a split between earned and unearned income, with 
the top rate on unearned income remaining at 70 percent and on 
earned income dropping to 50 percent.
    Chairman Hensarling. Dr. Barthold, if I could--and I didn't 
see a chart here--but would the same correlation prove roughly 
true for corporate tax receipts?
    Mr. Barthold. We did have--one of the figures, Figure 2, 
sir, showed the Federal tax receipts as a share of total 
receipts.
    Chairman Hensarling. But not as a share of GDP.
    Mr. Barthold. I have a supplemental table.
    Chairman Hensarling. But to some extent does this not 
suggest that there are limits to the amount of revenue that are 
going to be gained by increases in marginal brackets if they 
have ranged from anywhere on the personal level from 28 to 90 
percent. We still see roughly that revenues appear to be 
falling within this particular band. And so that was my 
question. And at some time I would like to see, if we could, 
that correlation of the corporate to GDP.
    It is my understanding that--from data from the Joint 
Committee on Taxation--that roughly 50 percent of small 
business profits are taxed at the top two individual rates, is 
that correct?
    Mr. Barthold. I believe we have published that number, sir, 
yes.
    Chairman Hensarling. Okay. And one of your charts also 
shows that there has been a large increase, I believe, in--I am 
trying to find the chart--in the number of non-C-corp entities. 
I guess it is your Figure 6, perhaps.
    Mr. Barthold. Yes. In the packet before you, Figure 7----
    Chairman Hensarling. Oh, I am sorry. It is Figure 7. So 
certainly since the late 1970s there has been a huge increase 
in essentially what are known as pass-through entities?
    Mr. Barthold. That is correct, sir.
    Chairman Hensarling. So is it fair to say then that 
increases in the top two individual tax rates could impact--
again, by your testimony--50 percent of small business 
profits--I don't know how many individual small businesses that 
is. Your Figure 7 would suggest that, again, we have a large 
number of pass-through entities that at least potentially could 
be impacted by that.
    The next question I have really has to do with the pro-
growth aspect that could be derived from some kind of 
fundamental business entity tax reform. I guess also to some 
extent your Figure 7 would suggest that tax reform in the realm 
of C-corps alone may prove problematic unless you deal with 
pass-through entities as well. Is that a fair----
    Mr. Barthold. Well, what I was trying to emphasize was that 
when we think of business income it is not just taxed in the 
Federal system through the tax on C-corporations, that there is 
a lot of business income that is reported on individual 
returns. But the concepts in terms of how we measure that 
income, the depreciation schedules, the treatment of research 
expenses, advertising expenses, are the same regardless of the 
entity cut.
    Chairman Hensarling. My time is about to wind down. I want 
to try to get in one more question.
    I am curious about the type of model that JCT would use and 
what type of academic studies that have been researched 
regarding the potential pro-growth aspects of fundamental 
business entity tax reform.
    I have seen a lot of information come over the transom. 
There was a 2010 Milken Institute Jobs for America report that 
concluded that taking our U.S. corporate tax rate to the OECD 
average of 25 percent could create 2.1 million private-sector 
jobs by 2019. I have seen a study by the Journal of Public 
Economics from a few years ago that found that a 10 percentage 
point reduction in U.S. corporate tax rate could boost GDP 
growth per capita by 1.1 to 1.8 percent per year. Can you give 
us a little bit more information concerning what model you use 
and how is it derived? What other studies have you looked at 
that might suggest to the committee the positive pro-growth 
aspects of fundamental business entity tax reform?
    Mr. Barthold. How long do I have, sir?
    Chairman Hensarling. Unfortunately, my time ran out. We 
will give you about 30 seconds, and then I will yield to my co-
chair.
    Mr. Barthold. Well, I will give it very quickly.
    We do multiple types of modeling for the members of 
Congress. The basic modeling that we do is based off of 
microsimulation models, and it is against the Congressional 
Budget Office macroeconomic baseline. And when we do that we 
look at many different changes in behavior in terms of choices 
that either individuals or businesses make. But for consistency 
in reporting to Congress and subject to the budget resolutions, 
we do not include a feedback effect in terms of this 
legislative package will increase or decrease the growth rate 
of the economy.
    So for the past near decade now under House Rule 13 we have 
been providing, as part of House Ways and Means Committee 
reports on tax bills, supplemental information of macroeconomic 
analysis; and we have three different primary macroeconomic 
models that we use to emphasize different assumptions and to 
emphasize different features that people think are important in 
the macroeconomy. And in that analysis we look at the effect on 
changes in labor force participation rates, in savings rates, 
in cross-border capital flows, and changes in investment 
incentives and how businesses respond----
    Chairman Hensarling. Dr. Barthold, if I could, I am setting 
a poor example here. So at this time allow me to my co-chair, 
Senator Murray.
    Senator Kerry. Mr. Chairman, I hope we are not being a 
prisoner of the clock where if any member asks a question--I am 
here to learn, and I hate to be truncating important data with 
such rigidity and ask that we allow the witness to answer.
    Representative Camp. Mr. Chairman, I would just say, having 
chaired committees, if we don't stay on the clock, we will 
never get through everyone's opportunity to have more than one 
chance at questioning. So I appreciate what the Senator is 
saying, but we are going to have to keep this moving. And we 
can always follow up with Mr. Barthold after. He is a 
government employee, and we can always talk to him after this 
hearing.
    Chairman Hensarling. We will have at least two rounds of 
questioning per member and two panels, so I appreciate that. 
And, again, I am not setting a particularly good example. And 
if other members wish to have the witness explore this 
particular question further they certainly can, but at this 
time allow me to yield to my co-chair, Senator Murray.
    Co-Chair Murray. Thank you very much.
    And thank you again, Dr. Barthold. I appreciate your 
testimony.
    This hearing is divided into corporate and individual tax 
sections, but I really wanted to start with the key issue 
facing millions of Americans today, and that really is jobs.
    We have heard a great deal about the negative impact the 
current economic situation and high unemployment rate has on 
the economy both in terms of demand for social services but 
also in reduced tax revenue. We have also heard this committee 
could have a positive effect on the fiscal situation of this 
country if we would support pro-growth policies in the short 
run, even if they result in greater spending, while promoting 
gradual and real changes to spending and revenues in the medium 
and the long term.
    In terms of taxes, last week CBO Director Elmendorf 
testified that CBO had considered various tax proposals and 
weighed their effectiveness in stimulating the economy. He 
mentioned reductions in payroll taxes as among the most 
powerful, followed by expensing of investment costs for 
businesses, and then followed below that by just a little bit 
broader reductions in income taxes.
    I wanted to ask you if JCT has performed a similar analysis 
of any kind and whether or not, if you did, your conclusions 
match or differ from CBO.
    Mr. Barthold. Thank you, Senator.
    We have not tried to replicate work that the Congressional 
Budget Office did, but we have, in a number of different 
projects for the Ways and Means Committee and other members of 
the tax-writing committees, looked at some of the effects of 
payroll tax reductions expensing provisions. And so let me just 
address the way we approach that, and I think the Congressional 
Budget Office's approach is similar.
    Expensing. Okay, expensing works to essentially reduce the 
cost of capital, reduce the cost of acquisition of new 
equipment by businesses. So it increases the after-tax return, 
makes it more attractive to make those investments. When we do 
our macroeconomic analysis, then we show that that leads to an 
increase in investment.
    Now, what becomes important also in that analysis is what 
is the context of the overall legislative package. Is it just 
providing expensing relief for expensing of capital equipment 
for a large number of years? Is it offset in some way?
    It is also important to think about how the Fed might react 
in terms of its policy for trying to moderate inflation. We 
don't--of course, right now, in the current environment, we 
don't think of inflation as a real--real problem. So as a 
general statement, yes, expensing can be a very powerful pro-
investment incentive.
    You mentioned payroll tax. We have looked at payroll tax. 
It usually is the effect that it depends are we talking--and 
this would be true of expensing, also--is it a permanent 
reduction in the payroll tax or a temporary reduction in the 
payroll tax? Is it offset in some way? So there is those same 
general questions.
    But then the principle, of course, is that if it reduces 
the payroll tax and increases the after-tax wage that has two 
effects. There is a cash flow effect. There is a short-run 
stimulus in terms of aggregate demand, more money in my pocket. 
I can potentially spend more, but it also makes it more 
attractive for me to work longer hours.
    Now, me personally, you already have me work fairly long 
hours, so that wouldn't be a personal effect. But it could mean 
that my wife might decide to, as she is currently not in the 
labor force, but maybe she would say, well, there is a better 
after-tax return to being in the labor force. And so labor 
supply would increase. And that is pro growth.
    But it is important to think in terms of the overall 
legislative package as well. We can't just say because a 
package has this in it that automatically you get one result 
all the time.
    Co-Chair Murray. Well, let me talk on corporate tax reform. 
As you well know, the U.S. corporate tax rate is 35 percent at 
the Federal level, 39 percent when the average State corporate 
tax is included. The average rate for other industrial 
countries of OECD is 25 percent, and only Japan has as high a 
rate.
    I think most people do agree that such high tax rates make 
the United States a less attractive place in which to do 
business. Our corporate Tax Code also distorts business 
decisions making. Instead of making and improving their widgets 
or hiring new people, they spend too much time and effort 
devising business strategies aimed simply at tax avoidance. I 
think we know that all of that reduces the number of jobs that 
are created here at home, where we are all focused, and puts 
greater strain elsewhere on us in terms of government spending.
    Companies in my home State have consistently been telling 
me that they care less about keeping a particular tax 
expenditure, even when they benefit from it, than having a 
predictable system of taxes with lower marginal rates. Right 
now, they don't necessarily want to game the system to pay a 
lower rate. They will use every loophole that is available to 
them, obviously. But they tell me that they would rather focus 
their efforts on making things and selling products around the 
world.
    So I think we all agree that our corporate Tax Code needs 
substantial reform, and I think it is important to do both the 
individual and the corporate side together because a 
significant number of businesses operating as pass-through 
entities pay taxes on the individual side. So to ensure the 
competitiveness of U.S. business it is important, I believe, to 
coordinate reforms for individual and corporate taxes; and I 
want to ask you if you agree that there are advantages to doing 
more comprehensive tax reform, as opposed to just looking at 
the corporate side.
    Mr. Barthold. In terms of business income, Senator, I think 
that was the point I was trying to emphasize in my brief run-
through. It was to note that there are businesses that are 
organized as C-corporations.
    I should note when you look at the supplemental material 
that I provided, while I have said there are a lot of non-C-
corporate businesses in terms of assets, large C-corporations 
own the vast majority of assets and earn the vast majority of 
business taxable income.
    Now, that said, I have noted that non-C-corporate entities 
are growing in number, and the income attributable to those 
entities is growing relative to the overall tax base. Because 
we define business income the same way, if we are looking--I 
think we should not look just at corporate reform but business 
income reform. And it would from a practical point of view, 
sort of a practical legislative point of view, from sort of the 
legislative weenie aspect, it would be very difficult to wall 
off a number of provisions and say we will have one set of 
rules if you are this type of entity and a potentially very, 
very different set of rules if you are another type of entity. 
Because then we would have to double back and have rules to 
keep people from--to restrict their entity choice, and that 
would be a bad outcome, to restrict entity choice.
    Co-Chair Murray. Okay. Thank you very much. My time has 
expired.
    Chairman Hensarling. The co-chair now recognizes Senator 
Kyl of Arizona.
    Senator Kyl. Thank you.
    Dr. Barthold, just to follow up on one of Senator Murray's 
questions with regard to the effect of short-term payroll tax 
deduction policy, in your studies did you find any evidence 
that either the payroll reductions--well, just take the most 
recent, but if you want to go back to the Bush administration, 
if you can recall that as well--did that have a stimulative 
effect on the economy and was it responsible for any job 
creation? Obviously, we had job reductions during that period 
of time. Did the temporary aspect of it reduce its 
effectiveness and was the need for people to deleverage such 
that, rather than spending a lot of that money, they ended up 
paying off debts or saving the money? Were those possible 
effects that reduced the effectiveness of that temporary 
policy?
    Mr. Barthold. Senator Kyl, just to be clear, you are 
talking about the tax rebates under the Bush administration.
    Senator Kyl. There was a tax rebate under Bush, and then 
more recently we had a payroll tax one-year policy, which some 
would like to see extended.
    Mr. Barthold. Since we have done some work recently on the 
payroll tax reduction, let me try and answer your question by 
addressing that.
    As I think I noted to Senator Murray, there is really sort 
of two aspects to that in terms of macroeconomic analysis. An 
increase in take-home pay can have a stimulative effect. It 
increases the taxpayer's cash flow and the consumer can consume 
more, if it is short--and that is true in the short term. There 
is mixed empirical results on whether if someone just has a 
very short-term increase in pay how much is saved as opposed to 
how much is spent. So there is an effect in terms of the 
efficacy as opposed to a long-run change, but there still is 
that short-run demand effect.
    Now, a second aspect that we talked about is, well, what is 
the supply effect, the labor supply response? To a short-run 
policy you would not expect a dramatic labor supply response, 
because labor supply decisions tend to be a little bit longer-
run decisions. Now, we had used one of our macroeconomic models 
to analyze a proposal to extend by 1 year a payroll tax 
reduction comparable to the one that is in present law----
    Senator Kyl. Could I just interrupt you? Rather than 
speculating about what might happen in the future if the 
current policy is extended, what is the evidence of what has 
happened during the policy that is in effect now?
    Mr. Barthold. Well, there is no academic study or solid 
empirical evidence right now. I mean, there is only sort of 
casual empiricism, because the data is not available. One 
problem with economics and analyzing the effects of policies is 
it sometimes takes 2, 3, 4 years to get the data and do a good 
analysis. So I don't have a good answer for you in terms of the 
effect of the policy that is currently in place right now.
    Senator Kyl. So given that there are some of these other 
factors, temporary versus permanent, short term versus longer 
term, and obvious deleveraging that is going on in the country 
right now, all of those are factors that you would have to put 
into your analysis about what potentially might happen in the 
future.
    Mr. Barthold. As I had noted, it is important to think of 
the overall context of the legislative package. You can't just 
say because it has this one piece in it that you get a 
guarantee.
    Senator Kyl. Cause and effect is complicated in the 
economy.
    Mr. Barthold. Well, there is many--a number of the other 
things that you mentioned will also affect business decisions 
and potentially employment decisions.
    Senator Kyl. Could I--we are all going to complain about 
the fact our time is short.
    I think I have got some yes-or-no questions, and I would 
like to ask you if you could just answer these true or false or 
yes or no. Let me just ask you about some general economic 
principles or statements. And these are, as you said, generally 
speaking, and then you qualified some of the other things that 
you said, and I totally appreciate that. But, generally, there 
is a positive relationship between economic growth and jobs, 
true or false?
    Mr. Barthold. Certainly.
    Senator Kyl. Right. True.
    There is a positive relationship between economic growth 
and resulting revenues to government.
    Mr. Barthold. That is also true, sir.
    Senator Kyl. There is a positive relationship between 
economic growth and reduced Federal spending on need-based 
programs.
    Mr. Barthold. Well, that will depend--I have got to give 
you a qualified one there, because it depends on what is 
happening in terms of where income is being earned.
    Senator Kyl. Fair enough.
    There is a positive relationship between economic growth 
and deficit reduction.
    Mr. Barthold. Well, that will depend on a lot of----
    Senator Kyl. Again, if we don't go spend all the money, all 
else being equal.
    Mr. Barthold. That would be true, sir.
    Senator Kyl. Right.
    Senator Murray was saying tax policy affects economic 
growth.
    Mr. Barthold. That is what our macroeconomic analysis is 
trying--it tries to provide members with information about how 
it might or when it might not.
    Senator Kyl. It may do it in a lot of different ways.
    The official revenue estimates from the Joint Committee on 
Taxation account for behavioral responses of individuals but 
not larger economic growth effects. Is that a fair way to state 
your revenue tables?
    Mr. Barthold. That is fair shorthand. We work against the 
Congressional Budget Office macroeconomic baseline and receipts 
baseline, and so we do not assume that the large economic 
aggregates of total income, total investment, employment, and 
inflation are altered.
    Senator Kyl. Right. But you also said earlier, I think in 
response to Representative Hensarling's question, that the 
Joint Committee on Taxation is capable of providing estimates 
of growth effects since it provides this analysis to the House. 
But these growth effects are not incorporated in the official 
score of a proposal, is that correct?
    Mr. Barthold. It certainly is the case they are not part of 
budget rules and budget scorekeeping. The information that we 
provide is a range of outcomes that reflect sensitivity to 
different assumptions. But, yes, we do provide that information 
to the House under Rule 13.
    Senator Kyl. Right. Where is our light or timer? So I am 
over. Sorry. Dadgum, I had a really good closing question.
    Chairman Hensarling. The Senator from Arizona will have 
another opportunity to ask that question.
    At this time, the chair will yield to Congressman Becerra 
of California.
    Representative Becerra. Thank you, Mr. Chairman.
    Mr. Barthold, good to see you again just 24 hours later. We 
saw you in Ways and Means, and we thank you for that testimony 
as well.
    Let me ask if we can get your Table number--I am sorry--
yeah, Table number 5 from your charts. And I would like to talk 
a little bit about the tax expenditures, at least those in this 
chart that apply to corporations.
    Expenditures seem to have quite a bit to do with the actual 
taxes paid by a company. And so while we hear about the 
corporate tax rate in America being around 35 percent, if you 
are able to qualify for some of these tax breaks, these tax 
expenditures, you can reduce what you effectively pay to the 
Federal Government in taxes so that your actual tax payments 
will be less than at a 35 percent rate.
    And, actually, that is not the chart I am referring to. It 
is Table, not Figure 5. So if we can go to the--it was your 
last chart. That is correct. You have that one. Just so we get 
it correct on the screen. It should be the very last chart I 
believe you presented.
    Mr. Barthold. In the handout that I gave you, it was the 
last item before part two.
    Representative Becerra. Right. I am not sure if folks can 
see that clearly.
    But I wanted to just move into that a little bit because, 
quite honestly, through the Tax Code we select winners and 
losers on the corporate side in terms of income taxes; and I 
suspect we will see with regard to tax expenditures these same 
kinds of tax breaks that are on the individual side of the Tax 
Code that we select winners and losers as well. And if I could 
ask a question. If we were to remove, for example, the first 
tax break that you list, a deferral of active income of 
controlled foreign corporations, $70 billion over a 4- or 5-
year period, who would lose?
    Mr. Barthold. For the benefit of the committee, the 
particular tax expenditure line item that Congressman Becerra 
is referring to, deferral of active income of controlled 
foreign corporations, relates to the point that I gave in my 
overall testimony that the United States taxes business income 
on a worldwide basis. But in the case of active income earned 
abroad the taxpayer may elect not to repatriate that income, 
and if the taxpayer so makes that election the tax is deferred 
until the taxpayer chooses to do that.
    So if the Congress were to decide to repeal deferral, just 
to take shorthand, it would mean that the income would all be 
taxed at the current statutory rates. Since this is about 
income that is earned abroad by corporations, we are largely 
talking about U.S.-headquartered multinational corporations, 
and so it is the income that is earned on overseas investments 
and overseas sales by those corporations.
    Representative Becerra. And just going through the list, 
you have a tax credit for low-income housing. I would assume if 
we were to remove that tax break the $27 billion that goes to 
those who take advantage of that tax break probably affects the 
housing market. And if you were to go to the expensing of 
research and experimental tax expenditure, where it is $25.5 
billion, that it is those companies that do research and 
experimentation that can claim on their taxes that they did 
certain research or experimenting activities and therefore get 
to reduce their tax burden.
    So we could decide, based on what we eliminate or leave, 
who becomes a winner and who becomes a loser. And so we have to 
be very careful how we do this, because we could influence 
actions of a lot of important companies that do business here 
and maybe do business elsewhere but are American companies. And 
so how we decide to reform the Tax Code could have a major 
impact.
    Obviously, those are all--the list of those different types 
of tax breaks list a good chunk of money that we don't collect 
because we give the tax break to those individual companies 
that could qualify. So as we talk about making changes we could 
pick--we could end up selecting the winners and losers.
    Let me ask another question in the brief amount of time 
that I have with regard to tax collection. We know that there 
is owed tax money that is not collected. In some cases, it is 
not intentional. People make a mistake on their filing. In some 
cases we know, and we have had cases where it has been proven, 
that people intentionally try to avoid paying their fair share 
of the taxes.
    There are estimates about how much we don't collect in 
taxes that is owed. I don't know if there is any recent 
estimate, but I know there was one from about 10 years ago that 
was somewhere around $345 billion or $350 billion. Has there 
been any update to that estimate of uncollected taxes?
    Mr. Barthold. The research division of the Internal Revenue 
Service runs what they call the National Research Project, and 
they are working on updating those estimates. But the estimates 
that you cite of about $350 billion in terms of what is 
referred to as the tax gap per year I think are the most 
recent, but they are a couple of--at least a couple of years 
old, sir.
    Representative Becerra. And with my time expiring I will 
see if I can explore this a little bit more when we come back 
and talk again about the individual income tax. So thank you 
very much for your testimony.
    Mr. Barthold. You are welcome, sir.
    Chairman Hensarling. The co-chair now recognizes 
Congressman Upton of Michigan.
    Representative Upton. Well, thank you, Mr. Chairman.
    And thank you, Mr. Barthold, for not only being here with 
us today but, as I understand it, you will be with us a number 
of times in the days ahead answering some questions, so I 
appreciate that flexibility.
    We know that the U.S. corporate tax rate is the second 
highest that there is. And as we look back at the size of the 
top 20 companies in the world 50 years ago, 17 of them were 
U.S. based; in 1985, 13 of the top 20 companies were in the 
U.S.; and, today, it is about six.
    The companies that I talk to, particularly in Michigan and 
before this committee here in Energy and Commerce, one of the 
things that they talk quite a bit about is certainty in the Tax 
Code. There is a lot of--and there has been--discussion, 
working with Chairmen Camp and Baucus as well, to hear their 
comments from the many hearings that they have had,. But the 
R&D tax credit, which stops and starts and stops and starts, is 
a real frustration. Accelerated depreciation has been a 
bipartisan idea for a long time to encourage investment here in 
this country and export products overseas.
    How would changes in these two, accelerated depreciation 
and R&D, and maybe moving the dials a little bit in terms of 
increased deductions or whatever, how would those help us with 
investment in jobs in this country? What would you encourage us 
to do as you have examined the Tax Code? Have you done studies 
along these lines?
    Mr. Barthold. Well, Congressman, let me refer back to the 
example that Senator Murray raised and you said that Doug 
Elmendorf broached with you a week ago; and that is, what does 
expensing do?
    Well, expensing is one form of accelerated depreciation. It 
is kind of like super-accelerated depreciation. Accelerated 
depreciation methods, again, they go to the cost of capital for 
business. Even from a sort of simple cash flow method it means 
that you have more cash available after tax from being able to 
recover more of your cost sooner. Or if you look at it in what 
economists refer to as the user cost of capital model looking 
over the lifetime of the asset, by having costs reduced early 
over the life of the asset, as opposed to later over the life 
of the asset, the present value of the returns to the asset are 
increased, so it makes it a better investment.
    So accelerated depreciation is a policy that encourages 
investment in the United States.
    Similarly, you mentioned the research credit and expensing 
of research activities. From sort of a--from a----
    Representative Upton. But do you have studies showing that 
if we did X or Y it would allow companies to do more investing 
here, allowing more people to work and pay taxes, a whole 
number of positive things for the economy? Is there a laundry 
list of things that can help us?
    Mr. Barthold. The joint committee staff responds to 
members' legislative initiatives, so we don't have really many 
formal studies that say do this as opposed to do that.
    Now, we have--in some of our macroeconomic work that we 
have undertaken to provide supplemental information to the Ways 
and Means Committee, we have looked at the role of expensing, 
we have looked at the role of reduced corporate tax rates, some 
of the same points that I made to the Senator earlier.
    There are a number of academic studies which we review to 
help inform our work, both in terms of our conventional 
estimates and our macroeconomic work, on the impact of 
incentives for research, on the impact of accelerated 
depreciation; and most of the economic findings are that there 
is an effect. There is differences of opinion as to how large 
the effect is. But the incentives generally are, as the 
theoretical discussion would suggest, that they are pro-
investment, or pro-research in the United States.
    Representative Upton. Do you have any studies that show if 
we increased the capital gains rate from the current 15 
percent, what it would do to capital investment by companies if 
we raised it to 20 or 25 percent?
    Mr. Barthold. Well, again, Congressman, no study per se on 
point. And you are asking about what would be the macroeconomic 
effect of that change.
    So to walk through, that is tax on capital gains affects 
the--let's think of it on corporate stock--the shareholders 
after-tax return to investment. So there is a couple of ways in 
which the shareholder gets returns through investment. There is 
a tax on dividends. There is----
    Representative Upton. But the company itself, if it----
    Mr. Barthold. Well, capital gain--remember, the capital 
gain, of course, relates to the change in the value of the 
company shares which can occur sort of two primary ways. The 
company is very profitable, and so its income earning potential 
increases, and so the value of the stock is, over the longer 
haul, sort of the discounted value of the potential net income 
of the company. So if the company is successful and its income 
goes up, the value of the stock should go up. And a higher tax 
on capital gains at then the individual level would say the 
return to me saving and putting my money in equities as opposed 
to maybe putting my money in the bank or buying debt 
instruments or some alternative investments makes that after-
tax return a little bit less, so I may choose to do other 
things.
    So our macroeconomic analysis tries to look at the more 
general portfolio effect of what are the different saving 
options that individuals have; what does this do to the 
taxation of the overall kind of net return to saving.
    Net saving is important in the macroeconomy, because that 
is really the wherewithal to invest. Those are the funds to 
invest. And we think that taxpayers do respond to the net 
return to saving, and if the net return to saving is reduced 
there will be a little bit less saving. That works through the 
macroeconomy. It is hard to sort of trace one particular aspect 
of that saving return, but that would be an important aspect.
    Chairman Hensarling. The time of the gentleman has expired. 
The co-chair will now recognize Senator Baucus of Montana.
    Senator Baucus. Thank you, Mr. Chairman. I would just like 
to just address a bit this point that the top two rates, if 
they were raised, hurt small business. It is true, as has been 
mentioned already here today, that 50 percent of small business 
income is subject to the top two rates, but it is not true that 
50 percent of small businesses, employers, are subject to the 
top two rates. In fact, only 3 percent are. And it is also, 
isn't it true, Mr. Barthold, that again only 3 percent of 
taxpayers with pass-through business income are subject to the 
top two rates; is that correct?
    Mr. Barthold. I believe that is a statistic that----
    Senator Baucus. About 3 percent of taxpayers, not 50 
percent, but 3 percent of taxpayers?
    Mr. Barthold. There are a large number of businesses, pass-
through businesses, the owners of which, so the recipients of 
the pass-through income, who are not in the top tax brackets.
    Senator Baucus. And in addition, isn't it true that about 
half of the 3 percent are taxpayers like bankers or celebrities 
that earn large salaries and don't employ anybody but really 
invest a small portion of their income in publicly traded pass-
throughs like, say, a REIT?
    Mr. Barthold. Could you----
    Senator Baucus. About half of that, half of the 3 percent 
are people who don't really employ people, but they are 
businesses that invest their income?
    Mr. Barthold. Certainly a number of the recipients of what 
you would consider active business income are the passive 
investors in those businesses. That is certainly----
    Senator Baucus. I was trying to make the main point that 
only about 3 percent of pass-through income is affected by the 
top two rates.
    There is a lot of talk about corporate tax reform, which I 
think it is good. In general the talk is we need to broaden the 
base, lower the rates, et cetera, and there is a lot of talk 
about lowering the top corporate rate to make it more 
competitive with other countries in the world, and that is 
good, but a lot of that would include eliminating, reducing 
many of the tax expenditures. Some will point out that the 
effective U.S. corporate rate is roughly comparable to the 
effective tax rate of other companies in other countries.
    I want to ask you if that is generally true, that our 
effective tax rate is competitive with other countries?
    Mr. Barthold. It is not always clear what some people mean 
by the effective tax rate, what some----
    Senator Baucus. After you deduct all the credits, 
exclusions, and all that.
    Mr. Barthold. Well, but there is also--it is after you 
deduct and it is a little bit over what time period. So I have 
seen the studies that you cite that say that, and so what you 
say is true that there are studies that say that, but part of 
what they are calculating is if you look at book reported 
income and book reported taxes of U.S. public corporations, 
they would not include in the taxes the taxes that are deferred 
abroad on what they consider income----
    Senator Baucus. Right. I don't want you to misunderstand. I 
am for going down this road. I think we should lower our 
corporate rates very significantly. However, I have also seen 
other data that show that today the different industries in the 
United States enjoy, there is a big difference among which 
industries in the United States enjoy tax expenditures compared 
with other industries. It is a big variation. For example, the 
manufacturing industry and the real estate industry take much 
better use of, because they are available, of the tax 
expenditures than, say, the services industry, the retail 
industry.
    So I am really trying to point out that if there were very 
significant changes, base broadening, and rate lowering of the 
corporate tax income that there would be big dislocations. Some 
industries would be hurt a lot compared to others, and some 
would benefit compared to others, and I think it is only 
important for us to know which those industries are and if we 
go down this road then to know what the transition rules should 
be to affect these different industries and then try to decide 
which of these industries are really more important for jobs 
and growth in America compared to others.
    Now, we don't want--nobody likes to pick winners and losers 
here, but it may be that some of these industries do provide 
more jobs than some others, and I think it is important that we 
note what they are. So it would help me, anyway, if Joint Tax 
could come up with some kind of a study that shows which 
industries benefit the most today compared to those that don't.
    Mr. Barthold. Senator, I will follow up with you and your 
staff. I think, as you know from work that we have done for you 
in the past, I mean, we do identify certain features of the Tax 
Code by the primary industry of the taxpayer, and we have done 
some analysis for you in the past. We can do some more.
    Senator Baucus. In part I am just trying to point out, this 
is not an easy undertaking, corporate tax reform. It takes 
time, and often when we go down this road it is more 
complicated than we think, and there are unintended 
consequences of major changes that we might otherwise make. It 
is important that we think through what the intended 
consequences are to try to avoid some of the unintended 
consequences.
    My time's expired.
    Chairman Hensarling. The co-chair now recognizes Senator 
Portman of Ohio.
    Senator Portman. Thank you, Mr. Chairman, and I appreciate 
Chairman Baucus' comments, both saying that he supports heading 
down the road of lowering these rates, which are high relative 
to our global competitors, but also the fact that this requires 
hard work, and I am hoping this committee can roll up its 
sleeves and with his guidance and Chairman Camp's guidance get 
into some of these tough issues because he is right, this is 
complicated.
    I will tell you that as recently as yesterday a CEO of an 
Ohio manufacturing company that does business overseas came to 
me and said, I am at the point that I believe that a lower rate 
is a better deal for me and my company than me taking advantage 
of many of the current preferences that are in the code for 
industrial companies, as the chairman said, and that would be 
consistent with what Co-Chair Murray said earlier about 
companies in her State that have come to her.
    So this is a path, I agree with Chairman Baucus, worth us 
pursuing, and with the extraordinary procedural opportunities 
before this committee, I am hoping that this committee will use 
this opportunity.
    I have two sort of simple questions that I have about the 
tax reforms that we have been discussing today. One is, you 
know, what should the tax burden be on the economy? And I think 
that is sort of the fundamental question that we need to answer 
in this committee, and that goes right to your testimony, Mr. 
Barthold, because in Figure 3 you talk about the 18 percent 
historical average, percent of GDP of taxes, and then in Figure 
5 you talk about what is going to happen over the coming 
decades, and you see that percent of GDP in Figure 5 going up 
significantly from 18 percent.
    So, one, we need to figure out what is the right burden on 
the economy, and that I think is properly reflected as the 
percent of GDP, and then the second question is really the 
fundamental one everyone has been asking today, what is the 
best way to collect those taxes. I suppose some would say it is 
a VAT tax or maybe some other consumption tax. I don't think 
this committee has the time and ability to get into that level 
of reform, but I do think that there has been a lot of work 
done by Chairman Baucus, Chairman Camp, and others to look at 
this to know that there is a way to lower rates and broaden the 
base, and best is in the eye of the beholder I suppose.
    Some have talked about distribution and fairness, some have 
talked about efficiency, the cost of compliance, which is 
really a separate issue from the impact on economic growth, 
although it relates to it, and then finally, you know, what is 
the most efficient way to allocate resources and what impact 
will that have, as Mr. Barthold has talked about today, on 
economic growth, and that is the sweet spot for this committee, 
as I see it, you know, how do we do smart tax reform that, one, 
does not provide additional new burdens on the economy that 
make an already weak economy even weaker, and we can't do that. 
President Obama has said that, President Clinton apparently 
said that today somewhere, but the second one that is smart so 
that it does generate more economic activity, and as a 
consequence of that more efficient Tax Code that generates more 
economic activity, generates more revenue.
    So it is a consequence of the fact that it does have an 
impact on economic growth. This feedback has to be measured, 
and this is one of the frustrations that many of us have had 
over the years, is that although there is plenty of economic 
analysis out there showing this is true, and you have talked 
about it this morning, Mr. Barthold, it needs to be reflected 
somehow and measured so that good policy can result, and so in 
the short time we have on this committee, I am really hoping 
that we will be able to have those measurements and we will be 
able to, with the Congressional Budget Office, be able to show 
what the impact is of various tax reform proposals.
    On the corporate rate, since we are talking about that now, 
we don't collect as much revenue as we should, due in part to 
the complex, inefficient, and loophole-ridden Tax Code we have 
got, and therefore most economists agree that fundamental 
corporate tax reform is going to produce more economic growth, 
and therefore, again, as a consequence, more revenues.
    Can you just quickly go through how you can give us that 
information? Let me try to summarize what I heard you say 
earlier, and you can correct me. One, you have a standard 
model, and that model will provide us with some behavioral 
changes. We talked earlier about allocating resources more 
efficiently under a Tax Code that makes more sense, and 
individual and firm responses I understand you can incorporate 
within your standard model. Is that correct?
    Mr. Barthold. Our conventional estimates always include 
behavioral responses of many different types, sir, yes.
    Senator Portman. So we will get some feedback through your 
standard modeling, your conventional modeling. Second, you have 
a macroeconomic effect you now do, you talked about House Rule 
XI, and you provide that as a supplemental analysis to Chairman 
Camp of Ways and Means Committee. That macroeconomic analysis 
you do is something that is made public, correct?
    Mr. Barthold. It is included in the House committee reports 
on a reported bill, yes, sir.
    Senator Portman. And can you extrapolate from the 
macroeconomic effects that you are already studying--you have 
the model to do it--as to what the revenue feedback is going to 
be from, say, an increase in GDP?
    Mr. Barthold. Senator, we have reported, as part of the 
reports, changes in GDP, changes in employment, changes in 
investment, and changes----
    Senator Portman. Labor market?
    Representative Barthold [continuing]. In revenues from the 
resulting growth, again across a range of sensitivity 
assumptions, to give sort of the breadth of possibilities.
    Senator Portman. And labor market as well?
    Mr. Barthold. Employment, yes, yes, sir.
    Senator Portman. And so you have provided revenue estimates 
from those changes----
    Mr. Barthold. No, not revenue----
    Senator Portman [continuing]. In GDP and labor market?
    Mr. Barthold. No, I wouldn't want to call them revenue 
estimates. You could, I guess, you know, think of taking the 
next step and saying what is the feedback that was identified 
and add that back in.
    Senator Portman. So it could be done?
    Mr. Barthold. Chairman Camp of Ways and Means held a 
hearing yesterday, as Mr. Becerra had noted, and they discussed 
some of those issues, and I can provide the members here later 
with copies of that testimony. We gave some examples of some 
macroeconomic----
    Senator Portman. But Mr. Barthold, let me just say because 
my time is short, I know this committee would be very 
interested in knowing what that feedback is, and again you all 
do great analysis. We need to be sure we have that analysis 
that in the real world there is going to be changes that will 
result in revenue changes, and we need to be able to consider 
that, and we have to do it in a short period of time here, 
which is several weeks.
    I know my time has expired, but let me also just put on the 
table, you also do a compliance analysis, and if you go from a 
compliance, say, 88 percent compliance to 89 or 90 percent 
compliance, that can have huge revenue changes, and then you do 
a complexity analysis which can also impact that; is that 
correct?
    Mr. Barthold. We do a complexity analysis. We are trying to 
study doing more comprehensive compliance analysis.
    Chairman Hensarling. The time of the gentleman has expired. 
The co-chair now recognizes Congressman Clyburn of South 
Carolina.
    Representative Clyburn. Thank you very much, Mr. Chairman. 
Mr. Chairman, it is my humble opinion that the overarching 
mission of this committee is to find common ground. Now, 
recently, the House Republicans released a jobs plan in which 
they referred to the Tax Code, and I quote, has grown too 
complicated and cumbersome and is fundamentally unfair. I could 
not agree more with this assessment. I think it is unfair that 
wages are often taxed at a higher rate than investments, I 
think it is unfair that the wealthiest among us get the most 
tax breaks, and I think it is unfair that a number of top 
corporations who are making record profits pay more to their 
CEOs than they do in taxes.
    Now, as we pursue common ground, I want to know whether or 
not you would agree that the number I have seen is that those 
people making over a million dollars a year, that is like 
three-tenths of 1 percent of our entire population.
    Mr. Barthold. That figure sounds correct, Congressman.
    Representative Clyburn. Okay. If that figure is correct, 
and you say that it is, I think the question before us today, 
one of the questions is, is it fair to value wealth more than 
we value work? Because if we are willing to say that our Tax 
Code reflects our value system, our Tax Code seems to currently 
put a greater value on wealth and dividends than it does on 
work and wages. Now, is it class warfare to seek some equity in 
the Tax Code? That is my question. Do you think it is tax 
warfare? I am not asking--I don't know whether it is or not, 
but do you think?
    Mr. Barthold. Well, Congressman, I don't offer an opinion 
on that sort of a question. I try and my staff tries to provide 
information to Members such as yourself so that you can make 
appropriate judgments for the American people.
    Representative Clyburn. Thank you. That is fair. Let me ask 
something about--I am a great believer that there is something 
that we ought to pursue in this committee called, we may call 
it consumption tax, we may call it a value-added tax, I don't 
know what we might want to call it, but isn't it true that 
every major economy with which the United States competes 
really funds their government through consumption taxes?
    Mr. Barthold. All the Western European economies have 
individual income taxes, payroll taxes, corporate income taxes, 
some excise taxes such as we do, some estate or inheritance 
taxes such as we do, and in addition they all have a value-
added tax.
    Representative Clyburn. Well, then, if CRS's estimates are 
correct that a value-added tax could be levied on a taxable 
base of $8.8 trillion, if we exempt food, health care, housing, 
higher education, and social services, that would leave a 
taxable base of around $5.1 trillion. Do you agree that a VAT 
is a viable option?
    Mr. Barthold. Through time, Congressman, a number of 
Members of Congress and, in fact, the Ways and Means Committee 
in the late 1990s held a series of hearings. They asked us to 
explore a number of issues related to value-added taxation. Our 
staff has identified for Congress a number of policy issues for 
them to think about. Conceptually, legislatively, yes, it 
would, you know--it is a viable option to create a VAT. It 
would take a lot of work, a lot of decisions by the Members, 
and a lot of technical work to get the law up and functioning 
for taxpayers.
    Representative Clyburn. Thank you. In the 50 seconds I have 
got left, let me be clear, when we talk about a 35 percent 
corporate tax rate in this country and comparing that with the 
rates in other countries, we really are not comparing apples to 
apples, we are actually comparing our rate to countries that 
have a value-added tax?
    Mr. Barthold. As I noted, sir, most of the----
    Representative Clyburn. In addition.
    Mr. Barthold. Those countries do have a value-added tax in 
addition to their corporate tax.
    Representative Clyburn. Thank you very much. I will yield 
back my 16 seconds to someone else.
    Chairman Hensarling. We thank the gentleman for yielding. 
The co-chair now recognizes Congressman Camp of Michigan.
    Representative Camp. Thank you, Mr. Chairman, and thank 
you, Mr. Barthold, for your testimony yesterday on economic 
models for analyzing tax reform.
    Figure 1 of the handout that you gave us shows the Federal 
receipts by source, and I just want to underscore, it shows 
more than 47 percent of those receipts to the Federal 
Government come from individuals, and only just over 8 percent 
come from corporations or what we call C corporations.
    Mr. Barthold. That is correct, sir.
    Representative Camp. Corporate income. And in Figure 4 in 
your projection of Federal revenues to come, which I think goes 
through 2021, it basically shows receipts from corporations 
being flat going forward, but yet revenue from individuals is 
shown to be increasing over time. Is that a fair statement of 
the two charts? I see another line on individual----
    Mr. Barthold. It is a little bit a matter of scale. You can 
see the green line, the corporate tax, does increase.
    Representative Camp. Slightly.
    Mr. Barthold. As expensing. It is currently slightly 
lowered by the fact that we have had bonus depreciation 
followed by expensing.
    Representative Camp. But the point is the individual is 
going to go up at a faster rate, receipts to the Federal 
Government, projection of Federal revenues to the government is 
going up greater from individuals than from corporations?
    Mr. Barthold. Yeah, I believe that is consistent with our 
projection.
    Representative Camp. And some of that is related to your 
testimony about the number of entities that are organized as 
pass-throughs, which pay taxes as individuals, so some of that 
is business activity that you are seeing increase in that 
chart, and isn't the United States somewhat unique that so much 
business activity takes place in the form of pass-through 
entities, S corporations, LLCs, partnerships, and isn't it fair 
to say that other countries do not have as much business 
activity taking place in a pass-through form?
    Mr. Barthold. These sorts of entities are more prevalent in 
the United States, but I am not expert enough in all the other 
countries to make a blanket statement.
    Representative Camp. All right. But corporate reform alone 
would then leave out many employers, leave them out of the 
equation because of the way that business activity is organized 
in the United States. So as we compare around the world, we 
need to understand that.
    Moving to corporate rates, which are a major factor in 
where businesses decide to invest and to locate, it has been 
said by yourself and others we have this high statutory rate, 
and with capital being increasingly mobile, it has become a 
much more important factor. The high corporate rate makes 
investment and job creation in the U.S. less likely as we 
compare around the world, and if you look particularly at 
Canada, who is certainly a key ally of ours but also a key 
trading partner, one of our largest trading partners, but when 
it comes to trade, they are one of our key competitors, you 
look in 1990 they had a 41\1/2\ percent corporate rate, in 2010 
it was 29, 2011 it is 16.5, in 2012 their corporate rate is 
going to go to 15 percent.
    Now, we have a high statutory rate, second highest in the 
world, in the OECD countries, but we have a number of 
expenditures, tax expenditures that then lower that rate, and 
that affects different sectors, as Chairman Baucus pointed out, 
in different parts of our economy in different ways, but aren't 
these other nations getting to their lower rates by eliminating 
these tax expenditures around the world?
    Mr. Barthold. Some of the other tax reforms that I am 
familiar with have made trade-offs of that sort. For example, 
Germany has lowered their statutory rate, and they made the, 
one of the trade-offs they made was to lower their statutory 
rate while lengthening cost recovery, cost recovery periods. 
That was a policy choice that they have made. So the reduction 
in special provisions I think as reported by the OECD, that 
they have noted that that has been a factor in a number of 
worldwide tax reforms.
    Representative Camp. And as Chairman Upton pointed out, the 
number of large companies headquartered in the U.S. has 
declined as other economies have emerged or changed their tax 
policy, and we are finding that many major employers are 
located in other countries rather than the U.S.
    Mr. Barthold. It is certainly a fact that worldwide large 
corporations, that fewer of the top 50, the top 100 are U.S.-
headquartered companies. So I am sure there is many factors 
that have accounted for that, you know, the growth of other 
countries, but that is certainly a fact, sir.
    Representative Camp. The other factor we face as a nation 
is the number of expiring business tax provisions, and can you 
comment on how that has grown? I mean, I remember as they used 
to call it the Rostenkowski 13, the 13 business tax 
expenditures that were expiring. How many do we have now that 
expire on a regular basis? Do you have that?
    Mr. Barthold. Okay, well, we actually, as I know you are 
familiar, Mr. Camp, we publish annually a list of expiring 
Federal tax provisions. Just for the other members, and I will 
get a copy of this for all the joint select committee, it is 
our document JCX2-11. We have done this annually for more than 
a decade, and it used to be a lot thinner publication. I think 
we are up to expiring within the next 2 years 150 or more 
different provisions of law.
    You know, it certainly creates uncertainty both at the 
individual level and at the business level of what is the law 
going to be next year, what is the law going to be 2 years from 
now, and obviously there are a lot of important policy choices 
that go into--that the members have to face as well.
    Representative Camp. Thank you, Mr. Barthold.
    Chairman Hensarling. The co-chair now recognizes Senator 
Kerry of Massachusetts.
    Senator Kerry. Thank you very much, Mr. Chairman. I want to 
focus later on some of the tax expenditures probably more on 
the individual, but I think it is important to note that 80 
percent of all of the money the Federal Government raises in 
taxes, 80 percent of it goes out right back into tax 
expenditures. Only 20 percent of what we raise actually goes 
into things we spend, pay for at the Federal level. 95 percent 
of those tax expenditures, 95 percent of that 80 percent goes 
to 10 top expenditure items.
    So I have got a lot of questions about the efficiency of 
that, among other things, and the choices that are made, which 
I think we have to look at, but I want to just say at the 
outset I second powerfully what Senator Portman said about our 
opportunity here, given the mandate and given the structure of 
this committee and its presentation to the Congress to take 
advantage of this to try to get that sweet spot which he talked 
about, which is really simplifying this, putting in place the 
most efficient choices that will drive our economy, that 
therefore will raise revenues and help us deal both with the 
deficit as well as jobs at the same time, and I think that is 
the key thing here.
    One of the things I would like to focus on very quickly is 
just this question, simple question. We hear a lot about the 
top tax rate with respect to corporations, and, yes, it is the 
second highest statutory rate, but the effective rate is what 
matters to people. Business people know how to judge the bottom 
line, and they make judgments accordingly, and we fall in the 
middle on that.
    Can you just say very quickly whether the committee should 
in its thinking here be looking at the top statutory rate or is 
it the effective rate that is more important?
    Mr. Barthold. Senator Kerry, as an economist, I think it is 
the effective marginal tax rate on investments that is really a 
key factor in terms of both growth and economic efficiency 
allocation across sectors. Now, that said, the effective 
marginal tax rate depends on the statutory rate. It also 
depends upon cost recovery, so it depends on how this is 
structured.
    Senator Kerry. The key would really be the interplay with 
whatever the expenditures and incentives and other pieces are, 
that is the important piece?
    Mr. Barthold. Yes.
    Senator Kerry. But we have to always keep that in mind, not 
just be frozen on the rate, but look at the overall complexity 
of what we create underneath it.
    Mr. Barthold. You want to look at the overall structure of 
how you are taxing the income.
    Senator Kerry. Now let me jump to that for a minute. I have 
been concerned for a long time about this issue of whether or 
not we inadvertently and in some cases maybe purposefully 
incent investment in other countries, that we are creating jobs 
in other countries because of the structure of the Tax Code, 
and the Fiscal Reform Commission recommended that we move to a 
territorial system and replace the current practice of taxing 
active foreign source income when it is repatriated, and this 
is obviously a current struggle. It is potentially a source of 
income as well as a better Tax Code and maybe a more 
competitive one.
    Could you share with the committee whether we can strike 
the right balance and have a system that is globally 
competitive, but encourages job creation and investment in the 
United States even as we were to create a territorial 
structure? Is that doable?
    Mr. Barthold. Well, strike the right balance is a difficult 
assessment for me, Senator. That would--that is----
    Senator Kerry. Well, can you envision a tax structure that 
does do that?
    Mr. Barthold. Let me, to be responsive to your question, 
highlight a few issues, some of which we have already talked 
about. Investment in the United States, things that are 
important to investment in the United States can be the 
effective marginal tax rate on the income earned by those 
investments, so the statutory rate, cost recovery matter. 
Research in the United States, many countries provide research 
incentives. We provide research incentives, so sort of weighing 
the relative, again the return to what is the return to income 
earned from research undertaken in the United States as opposed 
to research undertaken abroad would be a factor.
    When we look at territorial systems, we have to think 
about, well, what does it say about location of any--some 
investments in the United States as opposed to abroad. One 
feature of a territorial system which I will take generically 
as a dividend exemption system so that income earned abroad 
would only be taxed at whatever rate the foreign country has 
brought. If we lower our domestic rate and all other countries 
leave their rates the same, then under a territorial system the 
U.S. is relatively more attractive than it was before.
    Senator Kerry. But some of those countries--if I could just 
interrupt you for a minute, isn't it a fact that none of our 
major U.S. trading partners have a complete exemption with all 
taxes?
    Mr. Barthold. It is typically--there are some that are 95 
percent exemption, let's call it substantially complete.
    Senator Kerry. Is there a particular country you would 
point to where you think the model has sort of struck that 
balance?
    Mr. Barthold. I think there is a number of interesting 
features with policy decisions for the members to consider from 
a number of different countries, so I would----
    Senator Kerry. Could you perhaps share with us? I think it 
would be great if you and your terrific staff could present us 
with a sense of how to perhaps strike this balance, whether 
there are some provisions. What we don't want to do, what we 
are currently doing, everybody is talking about this massive 
amount of American corporate revenue sitting abroad that 
doesn't come home because it doesn't want to be taxed. We have 
had one round of sort of a grace amnesty, so to speak. It 
didn't work so well. And the question is whether or not we can 
find a way to see that money more effectively, the capital 
formation component put to better use, and still not wind up 
encouraging a company to go abroad to create the jobs. I mean, 
there is a balance there, it is difficult.
    Mr. Barthold. It is definitely a policy balancing act, sir. 
I am happy to try and work through options with the members of 
the committee if that is the direction you want to go. It is 
complex because----
    Senator Kerry. It is complex, but you have to acknowledge 
that what we are living with today is not effective or 
efficient.
    Mr. Barthold. What we have today is also complex and 
certainly has some incentives that people find creating 
inefficiencies.
    Senator Kerry. Thank you.
    Chairman Hensarling. The co-chair now recognizes Senator 
Toomey of Pennsylvania.
    Senator Toomey. Thanks, Mr. Chairman. I am glad to be 
following Senator Kerry, and I want to underscore my agreement 
with him and Senator Portman on how important it is that we 
really make every effort to do something substantial on the tax 
reform side. This is the most pro-growth thing we can do is to 
fundamentally reform our Tax Code. It is a way to generate very 
substantial revenue while lowering marginal tax rates. That 
creates jobs, that helps reduce our deficit problem. It can 
enhance fairness, which we desperately need to do.
    So I appreciate your testimony. I am glad we are focusing 
on this.
    I wanted to follow up a little bit on the vein that Senator 
Kerry was just discussing. You know, tax expenditures 
justifiably get a bad name because so many of them are, in my 
view, egregious flaws in the code, especially those that are 
narrowly targeted and have a distorting impact. But not all tax 
expenditures, not everything that we described as tax 
expenditures meets that description.
    The first one on the list here on Table 5 is the deferral 
of active income, right?
    Mr. Barthold. Correct.
    Senator Toomey. This reflects, of course, the fact that we 
choose not to tax at the time that it is earned income that is 
earned by overseas subsidiaries. If you looked at this as 
number one on the list and the biggest number by far on the 
list, you could superficially at a quick glance suggest, well, 
maybe this is a good source of revenue. But, in fact, I would 
argue that our current system puts us at a competitive 
disadvantage because despite whatever number there is on this 
form, we tax foreign income when it is brought home to a much 
larger degree than most of our competitors; isn't that true?
    Mr. Barthold. That is correct, sir.
    Senator Toomey. So if we were to actually tax it at the 
time that it is earned, we would be taking the competitive 
disadvantage we have now and making it worse, right?
    Mr. Barthold. You would be creating a higher tax rate on 
the total income of the U.S. corporation.
    Senator Toomey. Well, exactly, and we would be increasing 
the disparity, the difference between that tax rate that we 
charge on overseas income and that which our competitors 
charge?
    Mr. Barthold. To the extent that the competitor is in lower 
tax locations.
    Senator Toomey. Which most are?
    Mr. Barthold. Yes, sir.
    Senator Toomey. So one of the things that--well, I just 
think we should be very conscious of the fact that reducing tax 
expenditures, it matters very much which ones and how we were 
to go about doing it. I am in favor of moving in the direction 
of a territorial system, and I think of a lot of Pennsylvania 
companies, whether it is U.S. Steel or Heinz or Air Products 
and Chemicals, companies that have substantial operations 
overseas, they exist to serve local markets overseas, and what 
I would hate to see us do is a move in the direction that 
creates an even greater incentive than there already is to have 
corporate headquarters somewhere else because that costs us 
jobs, it costs us a lot of good jobs. So my preference would be 
that we move in the direction of a more territorial system.
    I would like to get back to another line of questioning 
that Senator Portman raised, and that is how your methodology 
quantifies the feedback of variations in policy. So as I 
understood you, you acknowledge that personal incentives affect 
behavior, and so you used an example of a reduction in the 
payroll tax might create an incentive for someone to enter the 
workforce because their after-tax earnings would be that much 
higher. Of course that is true of any reduction in marginal 
income tax rates, payroll or ordinary income.
    Mr. Barthold. That is correct, sir.
    Senator Toomey. And so my question is, when you analyze 
something like that, do you actually attempt to quantify the 
number of people who would enter the workforce in response to 
that greater incentive to work?
    Mr. Barthold. When we undertake our macroeconomic analysis, 
we report employment effects. Now, the employment effects are 
usually in terms of hours of work, which you can then loosely 
translate into, you know, numbers of individuals, but hours can 
also be overtime by currently employed individuals.
    Senator Toomey. Okay. So you acknowledge that. Do you also, 
then, in your calculation attribute a new source of revenue 
from these new workers, the fact that they are paying payroll 
tax, at a somewhat lower rate perhaps, but they are paying tax 
and they didn't before?
    Mr. Barthold. This goes to a point we have broached a 
couple of times. Our macroeconomic analysis that we have been 
undertaking for about a decade is geared at providing 
supplemental information to the Members of Congress relating to 
tax policy changes that they are considering, and so what we 
routinely report are changes in gross domestic product, changes 
in employment, changes in investment, and we also report what 
this would, could mean in terms of feedback effects on revenues 
because general, a general premise is if national income grows, 
the tax base will grow, and so there will be more income 
subject to tax.
    So in very loose terms, the answer to your question is yes. 
This is not reported for budget scorekeeping purposes or for 
House or Senate rule scorekeeping purposes, points of order, 
and the like.
    Senator Toomey. Okay. I see I am running out of time. I 
just want to underscore, I think this is a problem with the 
scorekeeping methodology. I mean, your analysis, you 
acknowledge that a reduction in a marginal income tax rate does 
not have a linear impact in reducing revenue because of the 
positive feedback effect that offsets at least some of that, 
but yet we don't capture that, we don't quantify that, as I 
understand you to describe your process of scoring a given 
change in tax policy.
    Mr. Barthold. The macroeconomic analysis we do is not part 
of scoring for Congressional scorekeeping and rule purposes.
    Senator Toomey. Thank you, Mr. Chairman.
    Chairman Hensarling. The co-chair now recognizes 
Congressman Van Hollen of Maryland.
    Representative Van Hollen. Thank you, Mr. Chairman. Thank 
you, Mr. Barthold, for your testimony. I just want to briefly 
turn to the question of pass-through entities because a lot of 
people have described these pass-through entities as if they 
were all small businesses, and I would just like to read from 
your testimony before the Senate Finance Committee July 14, 
2010, where you say ``the staff of the Joint Committee on 
Taxation estimates that in 2011 just under 750,000 taxpayers 
with net positive business income, 3 percent of all taxpayers 
with net positive business income, would have marginal rates 
that fell above $250,000;'' is that correct?
    Mr. Barthold. If you are reading from something I said.
    Representative Van Hollen. I just want to make sure that 
fact remains true. And you have this very important caveat 
right here in your testimony then. ``These figures for net 
positive business income do not imply that all the income is 
from entities that might be considered `small,' in quotations. 
For example, in 2005, 12,862 S corporations and 6,658 
partnerships had receipts of more than $50 million.''
    Now, my point here is not--isn't that these aren't good 
businesses. We should get over this conversation that all of 
these are small mom and pop entities because they are just not. 
If you had a Washington law firm with 500 partners, and those 
partners each took a draw of a million dollars, under this 
analysis they would be included as 500 distinct business 
entities, correct?
    Mr. Barthold. They would be----
    Representative Van Hollen. They would be included in your 
figure of 750,000?
    Mr. Barthold. How did you structure your law firm?
    Representative Van Hollen. As a partnership.
    Mr. Barthold. The partnership, we did a number of counts, 
and actually just to refer you to some more recent work that we 
have done, appendix tables in the prepared testimony that you 
have before you today, 10, 11, and 12, show you some ways that 
you can distribute partnerships and S corporations by size, 
either by the----
    Representative Van Hollen. I was just going to ask you 
that, Mr. Barthold.
    Mr. Barthold. Well, that is why I----
    Representative Van Hollen. Just so members realize as we 
have this conversation, on page 54, if you look at your charts, 
you will see that the top 2.2 percent of S corporations with 
gross receipts of more than $10 million received 61.7 percent 
of all the gross receipts of S corporations. Very small group. 
And if you look at the top 0.8 percent of partnerships with 
gross receipts of more than $10 million, they received 83.4 
percent of all gross receipts, all gross receipts. 83.4 came 
from the top 0.8 percent of the partnerships. So we should 
remember when we are talking about this issue that we are 
talking about in many cases individual partners at big law 
firms and big lobbyist firms and considering each one of them 
some kind of small business generator. I just don't think--I 
think people need to take that into account.
    Now, I want to ask you about the modeling.
    Mr. Barthold. Mr. Van Hollen, the only thing I wanted----
    Representative Van Hollen. Mr. Barthold, let me just--I am 
sorry, I have got 2 minutes. I want to ask you about the 
modeling here because Dr. Elmendorf testified before our 
committee, and he said that if we are to keep in place the tax 
cuts that were implemented in 2001, 2003 rather than allow them 
to lapse in our current law, we would have much larger deficits 
in the outyears, cumulatively 4.5 percent deficits.
    Now, as I understand your testimony, higher deficits, 
especially during a period of time of full employment, which we 
all hope to get back to, that those higher deficits can have a 
drag on the economy; is that correct?
    Mr. Barthold. The higher deficit requires higher government 
financing, and so potentially long run crowding out of private 
investment.
    Representative Van Hollen. And that crowding out is 
especially true when you have full employment, correct?
    Mr. Barthold. Well, it is not good anytime.
    Representative Van Hollen. That is right. So now to get 
back to your scoring, though, when tax cuts are scored, whether 
they were 2001, 2003, because you do not take into account some 
of those macroeconomic effects, you also don't take into 
account the fact that those tax cuts could contribute to larger 
deficits in the outyears and slow down the economy in terms of 
GDP, right?
    Mr. Barthold. Our macroeconomic analysis, when we provide 
it to the Ways and Means Committee, as you know, sir, accounts 
for what is happening with the deficit, how the package is 
funded, and so it does reflect potential crowding out, if that 
would occur.
    Representative Van Hollen. Right. But I guess it does not 
take the next step, which would be analogous to some of the 
points that are being raised, which is that that crowding out 
leads to lower GDP, which then leads to lower----
    Mr. Barthold. Our macroeconomic analysis will show that.
    Representative Van Hollen. Right, but will it show the 
feedback, then, the feedback loop in terms of growth, in terms 
of your scoring? I am talking about your scoring.
    Mr. Barthold. On scoring, again, to emphasize the point 
just made to Senator Toomey, we use our conventional, as does 
the Congressional Budget Office, we use our conventional 
models, which are scored against the Congressional Budget 
Office macroeconomic baseline where we are not assuming that 
GNP aggregate investment, aggregate employment, inflation rate, 
none of those factors.
    Representative Van Hollen. Thanks. I hear you. So you don't 
take that into account, the low growth rate?
    Mr. Barthold. Or conventional.
    Representative Van Hollen. On CBO, when they score 
investments, when CBO looks at the investment side, investment 
infrastructure and education, they don't take into account 
either the positive economic growth benefits of that in terms 
of receipts, do they?
    Mr. Barthold. In their conventional estimates, they do not 
account for positive effects or the potential crowding out, 
depending on----
    Representative Van Hollen. Right. It is analogous on the 
CBO side in terms of investment to what you do on the tax side, 
correct?
    Mr. Barthold. Correct, sir.
    Representative Van Hollen. Thank you. Thank you, Mr. 
Chairman.
    Chairman Hensarling. That completes the first round of 
questioning for the first panel. We will go to the second round 
of questioning. The co-chair will yield to himself.
    Dr. Barthold, in my opening statement I quoted from a 
letter from former CBO Director Dr. Peter Orszag that I believe 
under a current policy baseline, if solved on the tax side, 
that the tax rate for the lowest tax bracket would go from 10 
to 25, the 25 to 63, the 35 percent bracket to 88, the top 
corporate income tax rate would also increase from 35 to 88 
percent. Has the Joint Committee on Taxation performed any 
analysis that is similar to Dr. Orszag's analysis or would you 
have an opinion on his opinion?
    Mr. Barthold. I can very clearly say no because I am 
actually not even sure what he did and what you quoted, so I 
know we haven't done anything quite analogous to that. I would 
be happy to have my staff colleagues--I mean, we can take a 
look if you would like.
    Chairman Hensarling. Perhaps at a later time. I would 
appreciate that.
    Let me go to another subject matter, and that is who 
actually ends up paying our corporate tax rate in America? I 
suppose as a practical matter many view corporations as tax 
collectors and not taxpayers, so clearly there is some impact 
on consumers perhaps in the form of higher prices, depending 
upon the elasticity of demand for the product or service, 
workers in lower wages, and then certainly to shareholders in 
the form of potentially lower stock prices.
    Now, the last data that has come across my desk is a 
Congressional Budget Office analysis of about 4 or 5 years ago 
entitled International Burdens of the Corporate Income Tax that 
seemed to indicate in their analysis that 70 percent of the 
burden of the corporate income tax falls on labor in the form 
of lower wages. I don't necessarily believe you would be 
familiar with that particular study, but has JCT undertaken a 
similar study? Do you have opinions? Have you reviewed the 
academic literature on the subject? Do you have an opinion?
    Mr. Barthold. I mean, you are discussing really one of the 
big long-time important questions in economics, and that is 
what is the incidence of any tax or in particular the incidence 
of the corporate tax. In some of the economic literature there 
has been some ebb and flow in terms of its view. It is often--
it had long been thought that perhaps substantially all the 
burden of the corporate tax fell not just on corporate 
shareholders because at its sort of simplest terms the 
corporate income tax is a tax on the income earned by the 
equity owners of the firm, but more generally that it would 
have an effect on the overall, on all owners of capital, but 
some of the more recent empirical work and theoretical work, 
some of which you just cited, has looked at the increased 
cross-border mobility of capital and even fixed capital, 
relocation of factories from one country to another country to 
suggest that there is a greater responsiveness to after-tax 
returns of capital than perhaps after-tax returns of labor, and 
by that they have attempted to measure and come up with results 
such as you have noted that perhaps a substantial amount of the 
burden of the corporate tax actually falls on labor, by, if we 
make capital flee the U.S., there is less capital in the U.S., 
it is capital that is key to generating labor productivity, and 
it is labor productivity that helps determine wages.
    Chairman Hensarling. Dr. Barthold, my time has expired. So 
at this time let me yield to my co-chair, Senator Murray of 
Washington.
    Co-Chair Murray. Thank you very much. We hear that 
corporate tax reform or any tax reform must be revenue neutral, 
and as our Nation faces $14 trillion in debt, I think we need 
to be focused on job creation and long-term debt reduction. 
Your predecessor on JCT, Dr. Kleinbard, testified to the Senate 
Finance Committee last week, and he said, quote, we have to 
abandon our nostalgia for the Tax Reform Act of 1986. That tax 
reform effort was revenue neutral because it could afford to 
be, and that was also of course preceded and followed by major 
tax increases.
    We hear today a lot of stories about profitable 
corporations, even major corporations that are using tax 
expenditures in order to reduce and in some cases eliminate 
their tax bill completely. This is infuriating for average 
taxpayers who are dutifully paying their taxes and don't 
benefit as much from these big loopholes, and I am not talking 
about failing companies here who might need a break. I am 
talking about large, profitable companies.
    During this economic downturn Congress has provided 
generous incentives to encourage business activity; namely, 
through the Tax Code, and even before the downturn there were 
corporations that were very profitable but paid no share of 
Federal corporate income taxes.
    So I want to ask you if you have an assessment of what it 
costs our Treasury in terms of lost revenue from profitable 
corporations that don't pay corporate income taxes.
    Mr. Barthold. Basically our tax expenditure analysis 
provides most of the assessment that you are asking about, but 
it does it on a provision-by-provision basis. You can't--
because of interactions between them, you can't really add them 
up and say this is the aggregate amount lost, but the way we 
estimate, measure the tax expenditure is we look at what the 
business' tax liability would be with and without the provision 
in question, and so if it is a corporation that is in a loss 
position, there would be no tax liability regardless of the 
provision, so it is only looking at where there are otherwise, 
it would be positive taxable income. I hope that is responsive 
to your question.
    Co-Chair Murray. It is a response. In my last 30 seconds I 
just wanted to ask you about this repatriation issue because we 
are hearing a lot about that. Some people say it will raise 
revenue, some people claim it loses revenue. What is your take?
    Mr. Barthold. We have undertaken some estimates of a 
particular proposal or a couple of different proposals, and our 
assessment is that if we repeated the Section 965 repatriation 
holiday that was enacted in 2004, that under the current 
baseline that that would lose revenue. There would be short-run 
revenue increases but long-term revenue losses, generally from 
longer term erosion in the corporate tax base.
    Co-Chair Murray. Okay, thank you very much. Appreciate it.
    Chairman Hensarling. The co-chair recognizes Senator Kyl of 
Arizona.
    Senator Kyl. Thank you, Mr. Chairman. Let me just ask one 
follow-up question to the other questions I was going to ask in 
the interest of time here. You have heard a lot of frustration 
up here about the fact that while you can provide estimates to 
us of some of the behavioral impacts, that they are not 
reflected in the official estimates that you provide to us.
    My question is how we could change that or how we could 
better take advantage of the behavioral estimates that you do 
provide. Would it require a statutory change or simply some 
kind of change within Joint Tax Committee to provide those 
behavioral effects, those feedbacks that you talked about as 
part of your official scoring estimates?
    Mr. Barthold. Well, just as a reminder, I mean, we do 
provide information to the Members now, and----
    Senator Kyl. Understood, but you made it clear that they 
are not part of the official scoring.
    Mr. Barthold. So, I mean the Members--the budget rules are. 
I am not a budget rule expert, and I am not sure if you wanted 
to change budget rules or have information reported in a 
different fashion for us. I mean, we try to provide information 
to Members in a form that is useful to them. So I am really not 
sure how to answer your question about what to do about budget 
rules or decisions that the Select Committee might want to 
tackle.
    Senator Kyl. Appreciate that. What would it take for us, 
for you to include those estimates that you talked about, the 
feedback effects and so on, in your official revenue tables, in 
your official scores of tax changes?
    Mr. Barthold. Well, as I said, for the Ways and Means 
Committee now on a reported bill, we do provide the 
macroeconomic analysis with sensitivity. So it is available for 
Members of Congress to read the conventional estimate and the 
macroeconomic analysis and then make their decisions based upon 
that. So as a mechanical, just as a mechanical feature, there 
is really nothing. I will----
    Senator Kyl. Well, but there----
    Representative Barthold [continuing]. Note there are 
certain time constraints.
    Senator Kyl. If I could just interrupt, I understand--you 
understand our problem----
    Mr. Barthold. Right.
    Senator Kyl [continuing]. Which is that people are going to 
look at the score, how much of a 10-year savings have we 
achieved, did we meet our goal of 1.5, and if we can't score--
you and CBO are the arbiters here in some sense of the success 
of our policies in terms of everybody being willing to agree 
that it had that effect. The estimates that you give us are 
very useful to us, but it is not going to count in the score if 
there isn't a way to include it. So I am just asking, is it a 
matter of policy or practice? Is it something that CBO has as a 
policy that we would need to change? Is there a statutory 
change that we would have to make to include this? And if you 
don't know and would need to think about it, then could we 
visit with you some more so that we could help figure it out?
    Mr. Barthold. Certainly help. I might suggest that Mr. Van 
Hollen, who is on the House Budget Committee, might--would 
probably know more about this than----
    Senator Kyl. We will put the burden on him to answer the 
question then.
    Mr. Barthold. I am not trying to shrug the responsibility.
    Senator Kyl. You don't have to know the answer, but we 
need----
    Mr. Barthold. I am not a budget law expert. I mean, I think 
the question that you are posing, Senator, is one about House 
and Senate rules and about the budget law. The macroeconomic 
analysis that we provide currently is under a requirement under 
House rules. The complexity analysis that we provide with any 
bill was a result of legislative action, statutory action that 
Senator Portman was one of the primary movers on back in the 
late 1990s. So some of the things that we report to Members are 
a result of statute, some are as a result of rule.
    Senator Kyl. We can answer that question. I appreciate your 
response. Thank you very much.
    Thanks, Mr. Chairman.
    Chairman Hensarling. The co-chair now recognizes 
Congressman Becerra of California.
    Representative Becerra. Mr. Barthold, I think we have 
entered this interesting realm of asking you to predict the 
weather. We know this is a large economy, and when it is 
intertwined with the economies of the rest of the world it 
becomes very difficult for you to come up with estimates of 
what a tweak here will do or a tweak there will do, but you do 
have conventions that you use to help you make decisions, and 
we have to rely on those. We have to rely on the Congressional 
Budget Office working with you to help us come up with these as 
good as you can estimates of what might happen. You have 
developed these over the years, have you not?
    Mr. Barthold. Yes, sir, and we try to, you know, update the 
modeling, the data, the thinking on a continuous basis.
    Representative Becerra. Are you using what you believe are 
the best models that we have to date?
    Mr. Barthold. We think we are doing--I mean, we think we 
have very good models. They are more sophisticated than they 
were 10 years ago, 15 years ago. We have upgraded in a number 
of areas.
    Representative Becerra. You could use some of the less 
conventional, some of the unconventional models that are out 
there that haven't been as road tested as the models you use. 
They may show in the future to be more accurate than yours, but 
they also may show that they will have been less accurate than 
the ones that you use?
    Mr. Barthold. We look at work by outsiders all the time to 
help inform ourselves.
    Representative Becerra. Let me ask you this. In 30 days can 
you come up with a better model than what you are using now to 
tell us what the impact will be of anything we do on tax policy 
or budgetary policy?
    Mr. Barthold. Well, I am sorry to say, Mr. Becerra, but in 
a 30-day time period you are probably stuck with us as we are.
    Representative Becerra. Okay.
    Mr. Barthold. I mean, and as you had noted, yesterday I 
tried to outline some of the breadth and I believe 
sophistication of our modeling.
    Representative Becerra. And what you do will inform us as 
we try to move forward. We may look at what you do and say we 
agree completely, we may disagree, but at some point we have to 
make a decision what we will use as the model. And what you are 
saying to us is that you have given us the best model that you 
can, at least within the next 30 days.
    Let me ask you another question. Using that model, we have 
heard discussion about corporate tax reform. There is talk 
about eliminating those tax breaks that certain companies get 
over other companies and then using the money to plow back into 
the system to help reduce the rates for all the companies. That 
way you broaden the base, and you make it a fair Tax Code for 
all companies. If you were to eliminate all the tax breaks that 
right now corporations take advantage of and put the money into 
lower rates, using the model we have, does that help us, the 12 
of us, reduce the deficits that we currently see?
    Mr. Barthold. Lowering--if you did something to----
    Representative Becerra. You plow back all the money that 
you get from removing all the tax breaks into just lowering 
rates, using the current model that you use, do we reduce the 
deficits?
    Mr. Barthold. Let me make an important point, and I hope I 
don't--I guess I will probably exhaust your time, for which I 
apologize.
    As we have noted a couple of times, one of the large 
corporate overall business tax expenditures is accelerated 
depreciation. As I have noted, cost recovery is important in 
terms of determining the effective marginal rate or the user 
cost of capital. So it is not just looking at the statutory 
rate. It is also what is the statutory rate and over--and how 
do you get to recover costs for invested capital that determine 
the profitability of investments and so the decision to invest.
    So if you scale back accelerated cost recovery and use the 
benefits of that to reduce the corporate rate, you are, on one 
hand, saying you are making investment less attractive by 
scaling back the capital cost recovery and, on the other hand, 
saying you are making it more attractive by reducing the 
marginal rate on the income when it is ultimately taxed. And 
that in itself is not automatically pro growth, because you are 
going in one direction with cost recovery and the other 
direction with rate.
    We have--can I have a--I am sorry, sir.
    Chairman Hensarling. The witness can finish, please.
    Mr. Barthold. We have done some preliminary work. A couple 
of my colleagues presented some of this work just this last 
spring at a symposium at a national tax association. And it 
suggested within our corporate model that getting rid of 
accelerated depreciation and plowing just that money back into 
corporate tax rate is probably not going to be pro growth. It 
is going to be much more neutral.
    Chairman Hensarling. The time of the gentleman has expired.
    The co-chair wishes to announce to members that a vote for 
House Members is expected at 1:30. Doing a rough calculation 
and in consultation with my co-chairman, I would like to ask 
unanimous consent that for the second panel that the first 
round of questioning be limited to 5 minutes and the second 
round of questioning be limited to 1 minute. In a rough 
calculation, it means that all members would be able to ask 
their questions.
    Without objection, so ordered.
    Members are also encouraged, if they so choose, to 
consolidate questions they may have on both panels at this time 
in the interest of time.
    The chair now recognizes Congressman Upton of Michigan.
    Representative Upton. Thank you, Mr. Chairman.
    I just want to say I am one of those folks not only on this 
panel but I think in the entire Congress that wants to simplify 
the tax code, that knows that we need real tax reform, we want 
to simplify the code, we want to broaden the base, we want more 
people working, we want to add to economic growth. It would be 
great if we could do it in this panel. I don't know if we can. 
And if we can't, we will do a long-term plan to work with 
Chairman Camp to make sure that that happens.
    In Michigan, we have had some really tough times. You may 
know that our unemployment is over 11 percent, and we have had 
32 consecutive months at double-digit unemployment.
    My district is right on the State line. We have a new 
Governor. We have a new legislature. And they began to pick up 
the pieces and passed some tax reform and got rid of some 
business taxes. The person that was most upset was the Governor 
of Indiana, because he had billboards in my district that said 
``Michigan businesses, come on down'', and they did.
    So as I look at what we have to do on tax reform, we know 
that we have to compete with other nations around the world. 
And to comment on one of the things. I am going to yield back 
to you on some of my time. In the last Congress we passed a 
currency manipulation bill aimed at China, H.R. 2378. And I 
know I saw a headline today in some of the news that some of 
the business groups are very concerned that if this legislation 
came about again it would perhaps lead to retaliation by 
Chinese companies against American firms.
    I am wondering, if you all did a study as to what the 
impacts of the Chinese currency manipulation really mean as it 
relates to U.S. businesses that export or involve trading 
partners in China. Have you all done anything on that?
    Mr. Barthold. We work with the Congressional Budget Office 
on what we call indirect tax effects of nontax legislation, but 
I do not think that we did any work on the currency bill, sir.
    Representative Upton. Would it be possible to ask you maybe 
or do I have to go through Chairman Camp to get a request in on 
that?
    Mr. Barthold. No, we work for all the Members of Congress. 
I am not that familiar with the legislation, so I will ask a 
couple of my colleagues to look into it.
    Representative Upton. Okay. I yield back.
    Chairman Hensarling. The co-chair recognizes Senator Baucus 
of Montana.
    Senator Baucus. Thank you, Mr. Chairman.
    Mr. Barthold, it has been thrown around here by several 
people that there is about $1 trillion worth of tax 
expenditures annually. Could you tell me, I assume that is just 
a total, that it has not been--those provisions are not all 
scored. Because if you were to score all those, you reach a 
number maybe the same as or slightly different than just adding 
them all up.
    Mr. Barthold. The tax expenditure estimates are 
nonbehavioral estimates, and they are taken--and they are 
really just a measure of, if you are claiming this particular 
tax benefit, given your current tax position, what is the value 
of that benefit to you. It is not to say that if you were to 
eliminate that benefit that everything else that that taxpayer 
is doing would remain the same and you would be able to recoup 
all of that money.
    For example, I mean, in the business tax expenditures, just 
to pick on one, the low-income housing tax credit, now, some 
businesses that invest in these low-income housing partnerships 
through which they earn the tax credits they generally view 
that as a profitable investment. So if we were to repeal that--
and part of the way it is profitable is because it is tax 
sheltered. Well, we asked the question, where does that money 
go? What else happens?
    Senator Baucus. I know. But that does raise revenue. The 
repeal would raise revenue.
    Mr. Barthold. The repeal would raise revenue, but it would 
not raise revenue equal to the value that----
    Senator Baucus. That is my question. That is the point I am 
making. So if you total up all the deductions, the credits--
let's just take the deductions, itemized deductions, the 
standard deductions, what would that be, roughly?
    Mr. Barthold. We will have to get it for you, Senator.
    Senator Baucus. Okay. Therefore, you can't answer the next 
question, which is, if we want revenue neutrality, how much 
would that lower rates, individual rates?
    Mr. Barthold. I will have to--we will have to undertake 
that analysis. Some members have asked. We are actually in the 
process of trying to do something close to that.
    Senator Baucus. The first cut is just the itemizers or the 
standard deduction.
    Mr. Barthold. Uh-huh.
    Senator Baucus. The next level let's add, okay, exclusions 
and above-the-line measures. Let's say we repeal those.
    Mr. Barthold. Okay.
    Senator Baucus. And then, to some degree, you get the 
business income. We have got interest, expense, and was it 199 
deferral and so forth. It is difficult, because some of this 
applies to C-corps only and some doesn't.
    So if you could just--the major categories show what the 
revenue effect is. If Category 1, if they were all repealed in 
Category 1, those are the standard deduction and itemized 
deductions, that is one. Next is exclusions and so forth, 
employee health care exclusion, for example. And then the other 
would be other business income. And what the corresponding rate 
reduction would be for----
    Mr. Barthold. I will follow up with your staff on that for 
you, sir.
    Senator Baucus. Thank you.
    Chairman Hensarling. The co-chair now recognizes the 
Senator from Ohio, Mr. Portman.
    Senator Portman. Thank you, Mr. Chair.
    I think all of us are going to be really interested in that 
information because that goes to all the issues we talked about 
earlier about a more efficient Tax Code and how low can the 
rate get, how much can you broaden the base.
    I want to go through some specific corporate tax reform 
ideas that have come up today and maybe some concerns that have 
been raised and get your quick response, if I could. Because I 
think we have got a good hearing today on the big picture, but 
we left some things unanswered.
    First is the impact on so-called pass-throughs. And I know 
there has been a discussion about pass-throughs. It is more 
than 80 percent of U.S. businesses. I believe that is the 
latest number. It is sole proprietors and partnerships, sub-Ss 
and LLCs in my State.
    If you lowered the corporate rate and did so by getting rid 
of some of the existing preferences and those preferences also 
applied to the pass-throughs, it would seem unfair. They would 
still have a relatively high rate and yet they would not get 
the advantage of any of the changes and preferences. How would 
you address that apparent inequity to be sure that our smaller 
businesses who are pass-throughs and organized not as C-corps 
do not find themselves disadvantaged by corporate reform?
    Mr. Barthold. Well, Senator Portman, I noted earlier that I 
thought that it would be technically extremely, extremely 
difficult to wall off the elimination of preference items to 
one business entity and not--that it would create a lot of 
behavioral questions that you might or might not want to 
address about are you forcing people to change their choice of 
their preferred business entity, would you try to prohibit 
people from switching entity form.
    As to other options, I imagine you could think of things 
that you might do that could provide a new preference of some 
sort for the pass-through--for pass-through entities. We could 
explore options with you on that one.
    But one of the reasons I emphasize that business income is 
taxed as a C-corporation and business income is also taxed on 
the individual return was to make exactly that point, that you 
want to think of business income when you look at some of the 
reforms that you might have in mind and not----
    Senator Portman. Mr. Barthold, my time is short, and I 
apologize.
    One way to do it, it seems to me, is to look at the C-corp 
separately so you wouldn't apply it to individual rates. You 
just apply it to the----
    Mr. Barthold. But it is very difficult to wall that off. I 
mean, C-corporations participate in partnerships, for example, 
on research ventures with individuals and other non-C-
corporations.
    Senator Portman. Well, this is something, if you can get 
back to us on that, it would be very helpful. Because I know 
there are a number of us who have concerns about that and have 
some ideas about it. But we need to follow up on that.
    Second is the expiring provisions. You talked about 150 
over the next couple of years. Certainly the issue of certainty 
and predictability that everyone has raised here today should 
enter into that. In other words, some of these expiring 
provisions aren't nearly as effective as they should be because 
companies can't rely on them. And what is that impact in terms 
of economic growth and again in terms of extrapolating to 
revenue.
    On depreciated and expensing, you talked about that in 
response to Mr. Becerra. I think we would love to see something 
on the complexity of current depreciation rules and some of the 
inefficiencies in the current system. So it is not just 
accelerated depreciation we are talking about, it is the whole 
system. Although you indicate it reduces cost of capital for 
investment and capital formation. It has also got a lot of 
complexity involved with it, which makes it less efficient than 
it could be.
    And then, finally, the territorial side, which we don't 
have time to go into, evidently, since the chair is rightly 
stopping me, but we would love more information on, as Senator 
Kerry said, other ideas there.
    Chairman Hensarling. The gentleman from South Carolina, 
Congressman Clyburn, is recognized.
    Representative Clyburn. Thank you, Mr. Chairman.
    Mr. Chairman, in 1986, a Republican President and a 
Democratic Congress found common ground and came to a 
bipartisan agreement that is similar to the one we are trying 
to get to today. In that agreement, capital gains rates as well 
as income tax rates were the same--I think it was 28 percent--
and it stayed the same for about 4 years. Can you tell us 
whether or not there was any significant decrease in 
investments in the United States during that 4-year period?
    Mr. Barthold. I don't know the answer to that question off 
the top of my head. Between 1986 and 1990, the economy 
generally grew at a reasonable pace.
    Representative Clyburn. That same 4-year period there was 
growth.
    Now, since 1990, we have had subsequent reductions in the 
capital gains tax rate. Have we seen any significant increase 
that can be attributed to that--to that reduction?
    Mr. Barthold. Well, attributing broad macroeconomic 
outcomes to specific provisions is always very difficult. I 
mean, of course, in 1991 we did have an economic downturn. We 
then had strong, strong growth. We had a downturn again at the 
turn of the century.
    Representative Clyburn. Thank you, Mr. Chairman.
    Chairman Hensarling. The co-chairman recognizes Congressman 
Camp of Michigan.
    Representative Camp. Thank you, Mr. Chairman.
    The administration has expressed some interest in reducing 
the corporate rate, although we have not seen any detailed 
proposals or form of proposals. But most analysis is suggesting 
a corporate rate somewhere in the mid 20s. And the 
administration has suggested raising the top rate on 
individuals and pass-through entities to 40 percent or more.
    Figure 7 of your handout shows how many more pass-through 
returns than C-corp returns, and the number of pass-through 
returns are increasing while C-corps are declining. And figure 
8 shows the aggregate net income as a percentage of GDP of 
pass-through entities as being a significant player in the 
economy. So, regardless of size, I guess my point is there is a 
lot of economic activity and a lot of jobs in the U.S. that are 
connected to pass-throughs.
    My question for you is, what would be the economic 
consequences of taxing individuals in pass-throughs at a rate 
that is about 15 percentage points higher than would be a rate 
on C-corps if in fact we did tax return and how might that 
distort decisions on how businesses were organized, if you have 
an opinion on that.
    Mr. Barthold. Well, I think the economics are largely as 
you laid out, Mr. Camp. I mean, one additional factor to add in 
is, remember, C-corporation income tax is a second level of 
tax. Shareholders receive distributions, dividends, or capital 
gains. So there is corporate tax and then there is a tax at the 
individual level.
    So the sum--if we were to reduce the corporate tax, that 
would make a C-corporation relatively more attractive than 
other business entities. We might see some change, might see 
some diminished growth in one form at the expense of the other.
    Representative Camp. All right. Thank you.
    The other question I have is, again, since 1940, there has 
been a budget surplus about 11 years in the U.S., looking at 
your Figure 3 chart on Federal receipts as a percentage of GDP. 
In only one of those years, 2000, was it over 20 percent, and 
that was largely the result of capital gains. Now, outlays or 
spending in that same period since 1940 never exceeded 19.4 
percent of GDP of our economy, is that correct?
    Mr. Barthold. That sounds right, but I did not reproduce 
the figure, so I assume Doug Elmendorf presented that to the 
Joint Select Committee.
    Representative Camp. Doesn't that suggest then if we have 
been able to have a budget surplus in 11 years since 1940 yet 
we never had spending above 19.4 percent in those years and 
revenues were only above, as a percentage of our economy, only 
once in the year 2000 above that amount, doesn't that suggest 
that the answer has been--to controlling deficits has been to 
control spending, rather than to increase revenue to 
unsustainable levels?
    Mr. Barthold. Well, I am here just to be the tax weenie, 
Mr. Camp. I really don't have a good answer for that.
    Representative Camp. Thank you.
    Chairman Hensarling. The chair recognizes Senator Kerry of 
Massachusetts.
    Senator Kerry. Thank you very much.
    Dr. Barthold, have you, given the nonpartisan status of the 
Joint Tax Committee, ever compiled a list of those, quote, 
incentives that are not having either the intended economic 
impact or that don't--you know, aren't worth the level of 
foregone or forgiven revenue? Do you have a list of suggestions 
you might make to the committee about----
    Mr. Barthold. Not in recent memory have we really published 
a hit list of the type that you are suggesting. I mean, we 
have--as background work for both the Ways and Means Committee 
and the Finance Committee when they have reviewed different 
provisions in the, Code we have presented--
    Senator Kerry. Would it be possible for you in these next 
weeks, given the work, the analysis and, the various modeling 
that you have done, do you not have already a foundation of 
conclusions and evidence with respect to those things that are 
sort of most productive?
    Mr. Barthold. Probably not on as many as there are.
    Senator Kerry. On some, would you give us some?
    Mr. Barthold. We did work on some. We can present----
    Senator Kerry. It would be helpful to have your judgment on 
that.
    For instance--let me ask you a question. Are companies able 
to significantly lower their effective tax rate by using 
offshore subsidiaries to reassign the licensing of their 
intellectual property?
    Mr. Barthold. We have done some exploratory work on that, 
and there are certainly cases where that appears to be the 
case. We can't conclude that that is generally the case of all 
multinational corporations, but there certainly is evidence 
that income is being shifted abroad to foreign jurisdictions to 
lower overall worldwide tax revenue.
    Senator Kerry. Well, we know, for instance, there is one 
single famous building in the Cayman Islands which has maybe 
35,000, 40,000 registered companies that are not companies at 
all.
    Mr. Barthold. You are referring to Ugland House, I believe 
is the name.
    Senator Kerry. Yes, I am.
    But, clearly, those are----
    Mr. Barthold. But the point that you are making is what is 
the availability under present law to take income that would 
otherwise be part of the U.S. tax base and have it be reported 
offshore. And that is just not--that is not as simple as the 
existence of Ugland House, but there is a number of factors at 
play.
    Senator Kerry. Could you share with the committee those 
factors. Congressman Camp just asked you I think an important 
question about the pass-throughs and how they are treated and 
how they might be treated relative to the C-corps. Could you 
share with us your perception of is there one factor or what 
are the most critical factors that have contributed to the 
growth of the pass-throughs and the limited liability 
corporations?
    Mr. Barthold. Well, I think there is actually--there is not 
one. I think there is a number of factors.
    You used to do C-corporations--all public corporations 
basically are C-corporations. And so if you were seeking at 
some point the public capital markets you organized yourself as 
a C-corporation.
    Now, there has been a lot of financial innovation. The 
ability of new start-ups, be they small or be they large, to 
access broader pools of capital has not necessitated them to 
necessarily go to the public market. So that has certainly been 
one factor.
    The 1986 Tax Reform Act repealed the general utilities 
doctrine which was one legal doctrine that essentially made it 
potentially more favorable to operate in C form.
    And I will defer on a third and fourth.
    Senator Kerry. Well, we will follow up with you.
    Chairman Hensarling. The chair recognizes Senator Toomey of 
Pennsylvania.
    Senator Toomey. Thank you, Mr. Chairman.
    Mr. Barthold, we both discussed the fact that there are 
some very broad items that are often described as tax 
expenditures, the reduction of which wouldn't necessarily, 
obviously, be pro growth. You know, in the case of how we would 
treat income that is earned overseas, you make the point of how 
we treat depreciation.
    But there is another entire category that is just 
egregious, it seems to me, and that does cost us economic 
growth by virtue of their being there. It seems to me we have 
as many--maybe more than a dozen different subsidies for 
various kinds of green energy amounting to over $2.5 billion a 
year. We have ethanol tax credits that are nearly $6 billion a 
year. We have domestic manufacturing deductions that you can 
get by making a movie. We have credits for rehabilitating 
privately owned houses. My question for you is, don't these 
certainly amount to the government picking winners and losers 
within the economy?
    Mr. Barthold. Well, I think that precise point was made 
earlier by one of the other members of the joint committee. 
Winners, losers, they all reflect policy decisions made by 
Congress at some point.
    Senator Toomey. Right. Okay. So let me ask it this way. Do 
these features distort economic activity compared to what it 
would otherwise be?
    Mr. Barthold. Certainly. And that is actually part of what 
the tax expenditure notion is about if you favor one sector 
over another sector.
    Senator Toomey. Right. Isn't it generally likely that if we 
use the Tax Code to distort economic activity on balance we are 
going to have less economic growth than we would have if we 
allowed the marketplace to allocate capital instead of 
political people?
    Mr. Barthold. As a general matter abstracting from the 
potential for what economists call externalities, the general 
economic thinking is that the market outcome allocates capital 
most efficiently.
    Senator Toomey. And, for instance, in a specific case when 
it comes to these credits as they apply to energy, if you step 
back and look at it, if we as a society decide we are going to 
use the Tax Code to drive people toward the use of less 
efficient sources of energy, aren't we poorer as a society on 
balance as a result of that?
    Mr. Barthold. Again, if you--up to whether there might be 
market externalities involved, you are saying that by favoring 
one sector over another you are distorting choice, which means 
you are not getting as much total outcome as you otherwise 
possibly could.
    Senator Toomey. Well, yes.
    Mr. Barthold. But you have made that choice for the 
Congress----
    Senator Toomey. Right. For whatever other reasons, from a 
purely economic consideration, if you choose to use a less 
efficient source of energy, you have less prosperity, 
therefore, less growth and fewer jobs.
    Mr. Barthold. That is correct, sir.
    Senator Toomey. Thank you.
    Chairman Hensarling. The chair now recognizes Congressman 
Van Hollen of Maryland.
    Representative Van Hollen. Thank you, Mr. Chairman.
    I just want to agree with Mr. Camp and really with some of 
the observations you made earlier, Mr. Barthold, with respect 
to the need to consider corporate tax in conjunction with the 
individual tax side, given the increasing use of pass-through 
entities, so that we can make sure we understand the 
interrelationship between those things.
    Looking at the corporate side, because I think there is 
consensus that, at the top rate, 35 percent, as has been said, 
is obviously higher than a lot of our competitors, much higher. 
Effective rates aren't necessarily all higher. But just so that 
we know where we are heading here in terms of the revenue and 
deficit impact that we have to make up if we want to do this in 
a revenue neutral way, is there a rough rule of thumb as to 
what it would cost in terms of lost revenue for every percent, 
you know, reduction from, say, the 35 percent rate? I have 
heard a rough rule of thumb about $100 billion a year.
    Mr. Barthold. I will have to check that for you, Mr. Van 
Hollen. We did a calculation like that in the past couple of 
years. But the enactment of expensing, which sort of changes a 
lot of the business cash flow over the 10-year period over 
which we have measured this, changes that calculation a bit. So 
I will get a new calculation.
    Representative Van Hollen. It would be helpful for us just 
to sort through this. Because if we wanted to do this within, 
say, the corporate Tax Code we would have to look at which tax 
expenditures we thought we should prune or eliminate in the 
process.
    Let me just go back--circle back to a question that has 
been asked of you in different ways but with respect to 
scoring. And you have mentioned the House rules, and I have 
looked at some of the analyses that you have done with respect 
to taking into account the GDP effects. And as I understand 
your analyses, one of the reasons you might be reluctant to 
include a set rule within the score is that they take into 
account so many different factors in the economy, what 
decisions the Fed makes, whether or not deficits--you know, the 
cost of the tax cut is offset. I mean, is that one reason why 
it is complicated--it complicates being able to have a hard and 
fast rule on this?
    Mr. Barthold. There is uncertainty. And the analysis that 
we provided to the Ways and Means Committee is just reflective 
of the uncertainty.
    One of the points that you made, the uncertainty can arise 
from when you are dealing with changes in tax policy, changes 
in expenditure policy, you are dealing with what economists 
call fiscal policy, and there has been always the uncertainty 
of, well, if Congress takes one path of fiscal policy, what is 
the Fed's monetary policy? Do they accommodate that fully or do 
they partially offset that? That affects the macroeconomic 
outcomes.
    Representative Van Hollen. Thank you.
    Thank you, Mr. Chairman.
    Chairman Hensarling. Dr. Barthold, before you begin your 
next testimony, I would inform you and other members we would 
anticipate that the hearing would conclude 1:30-ish, 1:45 
perhaps. As a courtesy to you, the chair is certainly willing 
to declare a 5-minute recess.
    I see you are ready to plow on. You are recognized for your 
second round of testimony.
    Mr. Barthold. Well, thank you again.
    What I thought I would do, if you can turn back to just the 
little packet of pictures and tables, is I will try and give a 
very, again, a brief overview of the structure of the 
individual income tax, some prominent features. And then I 
wanted to maybe address in a little bit more detail the notion 
of going to our tax expenditure analysis that our staff 
prepares annually as the ultimate template for considering tax 
reform.
    But, first, the basic structure of the individual income 
tax.
    An individual computes his or her taxable income by 
starting from gross income. You reduce that by the sum of 
deductions allowable to get to adjusted gross income. Those are 
referred to as the above-the-line deductions. The taxpayer may 
then choose to either claim the standard deduction or itemized 
deductions, and then there is a deduction for personal 
exemptions depending upon the taxpayer's family size.
    Then graduated rates are applied to the taxpayer's taxable 
income to determine a preliminary tax liability. We have at 
present and have had for several years special lower maximum 
rates on income from capital gains--realized capital gains and 
qualified dividend income. And then the taxpayer from the 
preliminary tax liability may reduce that tax liability by 
certain allowable tax credits.
    Overlaying this, as I know all the members are aware, we 
have an individual alternative minimum tax, which is a separate 
calculation which in concept was designed to limit the overall 
ability to claim--and I will speak very loosely--too many 
deductions or too many credits.
    If you turn to the first page in the second part of the 
pamphlet, these are just really kind of the key parameters, the 
beginning of the key parameters through time in terms of 
defining the individual income tax. We have reported here from 
1975 through the current year the value of personal exemptions 
and the standard deduction. The reason to note these is to note 
that the individual income tax is a personalized income tax and 
that it depends upon filing status--married, single, head of 
household--and essentially the family size, the number of 
personal exemptions.
    Senator Portman. Would you tell us what page you are on? 
Are you on 71?
    Mr. Barthold. Senator Portman, if you go back to the 
special packet of figures, there was a break page that said 
part two. And it is because I organized the testimony as 
individual and business, but the co-chair said they would like 
to talk business first, so I put together this separate packet.
    So if you go to the--if you then go to the second page that 
is labeled Table 2, Federal individual income tax rates for 
2011, I reproduced this here just to show you the rate 
structure which begins with a bottom rate of 10 percent. But, 
remember, you don't get to that 10 percent rate until you are 
above the level of the sum of the standard deduction and the 
personal exemption. So there is effectively what is known as a 
zero bracket. Our top rate, as you can see, is 35 percent.
    But I do want to note that, as you are well aware, 
effective in 2013 under present law the current rate structure 
of 10, 15, 25, 28, 33, and 35 becomes 15, 28, 31, 36 and 39.6.
    For a little bit of history, the next page of your packet, 
Figure 10, reproduces for joint filers for some selected years 
the introductory point, the bracket point, and the value of the 
rate of the highest statutory marginal rate. And so what you 
can see is the history of the top bracket and the top rate 
through time since 1975.
    The top rate has declined from 70 percent to 35 percent, 
soon to be 39.6. But the entry point at which you get to that 
top rate has also declined. So the top bracket in real 2010 
dollars used to be at an income of--taxable income of over 
$800,000. Today, it is approximately $375,000.
    Comparable to that on the next page is Figure 11, sort of 
the history of where the bottom bracket begins. And you can see 
through time that there has not been as much change in the 
bottom bracket's rate, but the entry point in real dollar terms 
has increased. Whereas in 1975 it was approximately $13,750, 
measuring in today's dollars, now you have no tax liability at 
all until an income as a joint filer of over $18,700.
    Now, an additional feature of the last 35 years is that the 
Congress has enacted a number of tax credits. Some are specific 
to specific types of activities. In the previous discussion, 
some energy discussions were noted. The two most significant 
credits are the refundable credits, the earned income tax 
credit and the child tax credit.
    Turning now to the next page, on Table 3 I identify under 
our current projections the 10 largest individual tax 
expenditures as part of the Internal Revenue Code today. And I 
wanted to note, as I did for business, that several of these 
items have consistently been among the top 10 tax expenditure 
items that we report and measure since we began this exercise 
in 1975. Four have made the top 10 lists in eight of the sample 
periods that we have taken over this period: the exclusion of 
employer contributions for health care and health insurance 
premiums, the net exclusion of pension contributions and 
earnings from employer pension plans, the deduction for 
mortgage interest on owner-occupied homes, and the deduction 
for nonbusiness State and local taxes. That would be sales 
taxes and/or State income taxes.
    Now, earlier--I guess it was last December now--the 
National Commission on Fiscal Responsibility and Reform 
suggested that one approach to deficit control was to undertake 
a serious tax reform and to do that by looking at what is 
actually a long list of tax expenditures that the joint 
committee staff publishes annually. The appeal of that is 
probably made most clear in Figure 13, which is the very last 
page of the pamphlet--of the packet.
    It just shows in a simple numerical count--this is not 
measuring dollars, and we have had a little bit of a 
methodological change. I can explain that later, if you would 
like. But that, basically, the number of tax expenditures has 
grown through time. That what have may reasonably be deemed 
special provisions of law that deviate from a more 
theoretically pure income tax, that we have added additional 
special provisions through time. And that is what the line 
graph on page 13 shows.
    The National Commission suggested, let's take a clean 
slate, eliminate all or almost all the tax expenditures. And 
one thing I would like to emphasize for the committee--and this 
is coming from I guess persons must characterize themselves as 
sort of a tax technician--there is a lot of decisions that the 
members have to make to get to that clean-slate proposal. It is 
really not as easy I think as a simple read of the Commission 
report suggests of taking a clean slate.
    First of all, it is not clear as a matter of crafting 
legislation what it means to eliminate a tax expenditure and 
take a clean slate. For example, I will take a very minor tax 
expenditure but a tax expenditure nonetheless.
    A number of employers provide fitness and weight equipment 
in the workplace for their employees to use as a working place 
fringe benefit. Well, in tax principle that is compensation to 
the employee, and it is compensation that goes untaxed under 
the individual income tax.
    And so if we were to say, well, let's wipe out that tax 
expenditure, how do I do that? Do I have to take a valuation of 
the value of the weight equipment and attribute that to the 
employees? You know, if someone is, you know, the classic couch 
potato and they wouldn't touch an exercise machine for anything 
so they don't go to the one at the workplace, does that person 
get the inclusion or not? Or do we do some second-best approach 
and say, well, we know that the employer incurred expenses to 
provide those facilities. Let's deny a deduction to the 
employer.
    Those are--if we wanted to have a clean slate, those are a 
lot of important decisions both in terms of how we craft the 
law and in terms of what the ultimate revenue effect would be. 
And that is the second point that I want to make. In looking at 
our list of tax expenditures, the dollar value of a tax 
expenditure, as calculated by my staff and colleagues, is not 
the same as the estimated revenue effect to the Federal 
Treasury from elimination of that provision.
    As another example, home mortgage interest deduction, it is 
on the top 10 list that I posited there. If we were to 
eliminate the home mortgage interest deduction, it doesn't mean 
that we automatically capture the full value of all that 
deduction. You will see a lot of different behavioral effects. 
I might decide to take some additional funds out of my savings 
accounts and prepay part of my mortgage, reducing future 
interest payments that I would be making and thus affecting the 
tax liability and the tax revenues increases that would result 
in denying me a deduction for my home mortgage interest. A new 
home buyer might decide to buy a smaller home and thus incur a 
smaller mortgage than they would under the present law 
baseline.
    So two key points I would like to keep in mind is a lot of 
important decisions--because it is not obvious what it means to 
eliminate some tax expenditures and we can't just add up the 
dollars that we have--that my staff and I have reported as tax 
expenditure values and say we can get all that and reduce the 
deficit dollar by dollar by an elimination--we take into 
account a lot of important behavior, and how the legislation is 
crafted also affects that estimate.
    Chairman Hensarling. Thank you, Dr. Barthold.
    Before the co-chair recognizes himself, again in 
anticipation of pending votes in the House, with the indulgence 
of our friends from the Senate, the chair would like the take 
the liberty of calling upon House Members first and then 
yielding the gavel to my co-chair, Senator Murray, to conclude 
the hearing.
    So at this time I will yield to my----
    Co-Chair Murray. To the co-chair, many people think that 
this is a partisan divide. I want to just concede that the 
Senate is being conciliatory in the manner of this committee in 
allowing that to occur.
    Chairman Hensarling. Duly noted for the record.
    Dr. Barthold, I want to go back to your Figure 3, Federal 
receipts as a percentage of GDP. And you have graced us--and I 
mean that sincerely--with a number of charts that are very 
helpful. I did not--do you have a similar chart that just deals 
with Federal income tax receipts as a percentage of GDP with a 
historical retrospective to the post war? I did not see one.
    Mr. Barthold. I have it in the--not a picture, but I have 
the back-up data for it, I believe, in the Appendix around page 
7. If it would be helpful to have it in figure form, I can get 
that.
    Chairman Hensarling. At some point.
    Because, again, I want to return to a question I had 
earlier. Regardless of the ongoing debate about the wisdom of 
raising individual marginal rates, I am just questioning from a 
historical perspective just how promising of a reservoir of 
revenue that may prove to be. Because I have looked at other 
data--and, again, you don't have data right in front of me that 
totally correlates--but I believe somewhere in the early 1950s 
marginal rates were as high as 90 percent, yet income tax 
revenue as a percentage of GDP was roughly 10 percent. 
Somewhere in the late 1980s I believe the top marginal rate 
dropped as low as 28 percent, and income tax revenue as a 
percentage of GDP was somewhere in the 10\1/2\ to 11 percent 
range, I believe. And at least the data I have seen that shows 
wide disparities in the top marginal bracket yet income tax 
revenue as presented to GDP has been roughly 9 to 10 percent. 
Is that a fair reading of the data? Do you have data that is 
similar or contrary to that----
    Mr. Barthold. Page 49 of the large version of my testimony 
has the individual income tax and the other Federal taxes as a 
percentage of GDP year by year from 1950 to 2010.
    And just to confirm your recollection, as you did note 
earlier this morning, in coming out of World War II and then at 
the time of the Korean War top individual marginal tax rates 
were 90 percent or above. The 1986 Tax Reform Act lowered the 
top individual tax rate to 28 percent, although there had been 
other legislation prior to that. It didn't drop from 90 to 28. 
There had been other legislation prior to that.
    There were at the time, both in the 1950s and then later in 
the 1960s, 1970s, 1980s, a lot of other things going on, both 
in terms of the economy and, of course, in terms of tax policy. 
Part of the 1986 Reform Act broadened the base, so it lowered 
the rate and broadened the base. In the 1950s and 1960s, there 
was some tax sheltering activity. Part of the 1986 Act was to 
try and moderate, mitigate, tax sheltering activity with a 
broader base and attract people into more regular investments, 
as opposed to tax shelter investments.
    Chairman Hensarling. Forgive me, Dr. Barthold, but my time 
is running out here. I want to get in one or two more 
questions.
    In data we have seen from the Congressional Budget Office 
under their alternative fiscal scenario, essentially their 
current policy baseline, they show revenues growing in nominal 
terms by $2.1 trillion over the next decade. Under a current 
law baseline, they show tax revenues growing by $2.6 trillion 
over the next decade. Do you have a similar analysis? Do you 
agree or disagree with their figures that, either under a 
current policy baseline or a current law baseline, that tax 
revenues are predicted to increase?
    Mr. Barthold. Just to reemphasize, Mr. Hensarling, we do 
all our work consistent with the Congressional Budget Office 
macroeconomic and receipts baseline. So, yes, we concur. If 
that is how they characterized the current policy baseline, I 
concur in Doug Elmendorf's projections. Those are the 
projections that we use.
    Chairman Hensarling. In the limited time that I have, with 
respect to individual income tax rates, one of my colleagues 
brought up the question of tax fairness, which is a very 
important subject. It tends to be a subjective subject. It is 
important for a number of reasons, I assume not the least of 
which is compliance.
    But with respect to the facts, the latest data I have seen 
from the IRS I believe dates back to either 2007 or 2008 and 
would indicate that the top 1 percent of wage earners pay 
approximately 40 percent of the income taxes; the top 5 percent 
pay approximately 60 percent of the income taxes. Do you agree 
with that analysis?
    Mr. Barthold. I will produce separate tabs for you on 
that----
    Chairman Hensarling. I appreciate that.
    My time has expired. And, again, the gentleman from 
California has perfect timing, so the co-chair will yield to 
the gentleman from California, Congressman Becerra.
    Representative Becerra. Thank you, Mr. Chairman.
    Mr. Barthold, thanks again, and let me focus on a couple of 
things.
    We have heard quite a bit in the last several days about 
the Buffett rule, that someone like Mr. Buffett, one of the 
wealthiest men in the world, pays at a lower rate of taxation 
than does his secretary. Could you tell us a little bit about 
the features of the Tax Code that makes something like this 
possible, that someone who is making so much money, not a 
millionaire but a billionaire, could actually have an effective 
tax rate that is lower than his secretary?
    Mr. Barthold. I assume that what Mr. Buffett is referring 
to is his average tax rate, which is the total amount of tax 
that he pays over his total amount of income, although it is 
possible he might be referring to his marginal tax rate. I am 
honestly not clear on what he is claiming.
    But let's assume that his secretary is paid less than 
approximately $106,000 a year. So that would mean that the 
secretary is--each additional dollar--and I will talk marginal 
tax rate--is subject to the individual income tax rate and is 
subject to the payroll tax rate. Now, Mr. Buffett, as you 
posited, I don't know what salary he is paid, but his total 
income is not all subject to the payroll tax rate, the Social 
Security part of payroll.
    Representative Becerra. So any individual that has an 
income that exceeds $106,000, $107,000----
    Mr. Barthold. That exceeds the wage base is not subject to 
the Social Security part of the payroll tax. Their wage income 
is still subject to the Medicare part of the payroll tax. So 
that would be one factor.
    Representative Becerra. So that helps lower the rate a bit 
for those who are wealthier or who make over $107,000 in 
income.
    Mr. Barthold. In terms of a marginal rate.
    Now, if we are looking at average tax rate it becomes a 
little bit more complex. Because, as I noted here, depending 
upon your filing status and number of dependants, the first 
$10,000 to $15,000 to $18,000 of income is not subject to any 
tax and, in some situations, you are eligible for the earned 
income tax credit. Those features would go into calculating an 
average tax rate.
    Representative Becerra. Let me see if I can concentrate you 
a little bit, because I know my time will expire.
    Someone who has a lot of investment income, passive income, 
you have got dollars in stocks or bonds, does the fact that 
part of your income or a great portion of your income is 
generated through those investments, through passive income, 
have a great deal to do with the distortion we see in someone 
very wealthy, having a high income paying at a lower rate than 
his or her secretary?
    Mr. Barthold. Both the relative average and/or effective 
marginal rate would be affected by the composition of income. 
Under present law, there is a top statutory tax rate on income 
from capital gains of 15 percent.
    Representative Becerra. So let me make sure. So capital 
gains, right now, 15 percent is taxed. There is a 15 percent 
tax on the gain on a particular investment, capital gains 
investment.
    Mr. Barthold. If you realize an asset that has a gain so 
your stock appreciated in value and you sold it, the gain would 
be taxed at a maximum of 15 percent.
    Representative Becerra. Right. Let me see if I--okay. 
Because I am going to quickly run out of time.
    So your stock appreciated, you sold it, you had a gain on 
it, a profit, you are taxed at 15 percent.
    Mr. Barthold. That is correct.
    Representative Becerra. The secretary gets a paycheck every 
2 weeks, every month, sees the payroll deduction, pays taxes on 
the income, could be at the higher level of up to 28 percent. 
She is paying at 28 percent if she has got income that takes 
her to that tax rate, but the profits on that stock that was 
sold will only pay at the 15 percent. That could account for 
part of why some folks who are very wealthy have a lower rate.
    Now, another question. We often hear people say, well, some 
Americans don't pay any taxes. What they are I think really 
saying is they don't pay any Federal income taxes. Because most 
Americans will tell you, I just went to the grocery store, and 
I pay taxes, the sales tax. Every time I take a look at my 
property tax bill and I have to make that payment, I pay taxes 
on the property. There are certain excise taxes. So even 
modest-income Americans are paying taxes of some sort, is that 
correct?
    Mr. Barthold. We have a lot of different taxes in the 
United States, yes, sir.
    Representative Becerra. Thank you.
    I yield back my time. Thank you, Mr. Chairman.
    Chairman Hensarling. The co-chair recognizes Congressman 
Upton of Michigan.
    Representative Upton. Thank you, Mr. Chairman.
    Again, I want to reiterate and put myself firmly in support 
of tax reform. Though I wasn't here for Kemp-Roth I would love 
to vote for Camp-Baucus at some point down the line, maybe in 
the next 2 months.
    Let me ask a couple of questions. One, you talked a little 
bit about the mortgage interest deduction and the fact that it 
may not be scored--if that was removed, it may not be scored at 
the $484 billion, as you have reflected here on Table 3. Have 
you actually--has Joint Tax actually done an analysis on if 
that was removed what the impact would be, the jobs and 
economic impact on home builders and roofers and the whole 
impact on the construction sector across the country if that 
was taken away?
    Mr. Barthold. We have not been asked to do that, sir.
    Some of our macroeconomic capability in the modeling we do 
separately model a housing sector, but we have not looked at a 
proposal that targets a large swath of mortgage interest 
deductions either for new loans or existing loans.
    Representative Upton. I think that would be very important 
for the committee to understand in terms of the economic impact 
if that was removed.
    The second thing, I want to get back briefly to this cap or 
if the 15 percent on capital gains was increased. Again, you 
mentioned earlier my question--there is a question as to how 
many folks, if you raised that percentage, would it be--would 
folks not bank as much or save as much? Would they spend it? 
What is the impact on jobs if that 15 percent capital gains tax 
was raised in terms of the spending power that folks will have 
taken away because they won't have that income for themselves? 
Have you done any studies on that at all or not, particularly 
maybe as reflected when we added a higher tax rate in earlier 
years?
    Mr. Barthold. Well, Congressman, under present law, that 15 
percent rate moves to 20 percent in 2013.
    And, again, we have not recently had any--really any 
request to analyze a broader change to raise that rate, so we 
have not undertaken a macroeconomic analysis. I don't even 
think we have done one of our conventional estimates recently 
for a change in that rate.
    Representative Upton. The last question that I have is, I 
know earlier this year former Assistant Treasury Secretary Pam 
Olson told the Senate Finance Committee that if the AMT 
survived tax reform that the committee should go back and start 
over. I would like to think that we would have the same view 
among the 12 of us here.
    What are the compliance and complexity issues involved as 
it relates to removing the AMT? I know, as I understand it, 
when it first was put into place the view was that it was going 
to impact about 16 American families, and today obviously it is 
tens of thousands. So what advice do you have as it relates to 
that?
    Mr. Barthold. Well, the AMT was redesigned in 1986. And 
really kind of the intent of Congress in 1986, it wasn't per se 
a small number of higher-income families. It was really to say 
we are broadening the base, and we wanted to put some overall 
cap on the ability of people to take the deductions or special 
credits or exclusions that remain. Now, that in and of itself 
didn't automatically target it at any particular income level. 
The targeting was by the exemption.
    Complexity, the fact that you run a dual tax system and 
that you plan or you have to prepare your taxes under one 
schedule and then go recompute under a different schedule, 
obviously additional time taken, additional complexity, 
additional chance for error.
    I think everyone on our staff, of course, recognizes that a 
number of people are frustrated with sort of a dual system. It 
is a difficult policy problem that I know the members face.
    Chairman Hensarling. The co-chair now recognizes 
Congressman Clyburn of South Carolina.
    Representative Clyburn. Thank you, Mr. Chairman. Mr. 
Barthold, thank you so much. I have two quick questions.
    When Dr. Elmendorf testified last week, I asked him a 
question about unemployment and what impact that number has on 
the deficit. Could you give me some idea as to whether or not 
you think there is any correlation between that unemployment 
rate, job growth, and the deficit.
    Mr. Barthold. Between job growth and----
    Representative Clyburn. Job growth. Let me ask it another 
way. The impact, reducing the unemployment. If you were to drop 
unemployment from 9.1 to, say, 8.6, can you give us some idea 
of what impact that would have on the deficit?
    Mr. Barthold. Well, I am sure that Doug Elmendorf probably 
gave a more precise estimate. I think the point that he----
    Representative Clyburn. I assure you he didn't. He said he 
would have to get back to us.
    Mr. Barthold. Oh, he did, okay. Well, then, I will wait for 
that, too, but I will tell you the general principle that is 
going to, to get lower unemployment, you are getting stronger 
economic growth. Stronger economic growth means that there is 
more national income, which means that our tax base is 
expanding, so if we could magically get more economic growth, 
you know, doing nothing, then the deficit would decline from 
increased economic growth, and so----
    Representative Clyburn. So there is a correlation.
    Mr. Barthold. I, too, will wait for Doug's analysis on 
that.
    Representative Clyburn. Let me ask you, what impact would 
lifting the payroll taxes have, if you were to lift that cap, I 
know it is $106,800 today, if that were moved to 212, 215?
    Mr. Barthold. We have not had any cause to estimate a 
proposal such as that. If the Joint Select Committee wanted to 
explore that, we could provide an estimate of that proposal.
    Representative Clyburn. Mr. Chairman, would it be okay to 
ask for? I would like to see some analyses----
    Mr. Barthold. Okay, we will provide that.
    Representative Clyburn [continuing]. Incrementally up to 
doubling it.
    Mr. Barthold. Okay. So to a wage base of $212,000 was 
your----
    Representative Clyburn. Maybe 150, 175, 212, some 
incremental steps.
    Mr. Barthold. Okay, a couple of different halfway marks.
    Representative Clyburn. Yes, sir.
    Mr. Barthold. Okay, we will respond.
    Representative Clyburn. Thank you. Finally, I also would 
like to see, I understand you are going to get back to us with 
the numbers as to who is paying how much, and I know I have 
been hearing talk of late about whether or not the low income 
pay their fair share of taxes. Could you provide us with some 
kind of a profile of who the taxpayers are and what kind of 
taxes they are paying?
    Mr. Barthold. Okay. We have for both Ways and Means and 
Finance for some hearing work have provided some analysis like 
that. I will assemble that and I will get that to the Joint 
Select Committee members.
    Representative Clyburn. I would very much like to see that. 
Thank you so much, and I yield back.
    Chairman Hensarling. The chair recognizes Congressman Camp 
of Michigan.
    Representative Camp. Thank you, Mr. Chairman. The Joint 
Committee on Taxation regularly publishes data on average tax 
rates paid by Americans, do they not?
    Mr. Barthold. Well, actually we don't make it a routine 
practice, but we end up for work for your committee and for the 
Finance Committee often preparing that information.
    Representative Camp. And you have recently published the 
data on that?
    Mr. Barthold. Yes, we have.
    Representative Camp. And it is made available to the 
public?
    Mr. Barthold. Yes, it is.
    Representative Camp. And you are not alone, the IRS also 
does this?
    Mr. Barthold. The IRS reports with a lag because they 
report on actual, compilations of actual tax returns filed.
    Representative Camp. And the Congressional Budget Office 
also does this, do they not?
    Mr. Barthold. CBO does some distribution work using 
slightly different modeling assumptions, but yes, they do.
    Representative Camp. And according to the recent Joint 
Committee on Taxation, and I just want to go at this point of 
millionaires and billionaires pay lower rates than middle class 
families, which has been out there in the public domain, and I 
just want to go at this point.
    Mr. Barthold. Certainly.
    Representative Camp. According to your recent Joint 
Committee on Taxation data on income, social insurance and 
excise taxes, Americans with incomes between $50- and $75,000 
pay an average tax rate of 12.8 percent, and Americans with 
incomes over a million dollars pay an average tax rate of 23.6 
percent?
    Mr. Barthold. That is income and payroll taxes combined.
    Representative Camp. Yes.
    Mr. Barthold. Yes, sir, that sounds----
    Representative Camp. That sounds correct? And the IRS backs 
this up. Every agency does a little bit different analysis, but 
they also have the most recent data saying on individual income 
tax rates Americans making a million dollars or more pay an 
average of 23.3 percent, so it pretty closely tracks what you 
say, but they say Americans between $50,000 and $100,000 pay an 
average rate of 8.9 percent.
    Mr. Barthold. Okay.
    Representative Camp. And CBO has a similar analysis. 
According to their most recent data on Federal taxes, and that 
is income, social insurance, corporate income taxes, and excise 
taxes, and household income, the top 1 percent of American 
households who earn an average, and they have a category of 
1.7, above $1.7 million, pay an average tax of 31.2 percent, 
and middle income families pay an average--and that is between 
an average income of $60,700--pay 14.2 percent. So in America 
it is just not the case that millionaires and billionaires pay 
at a lower rate than middle class families.
    Mr. Barthold. I was going to say that is why I was trying 
to clarify for Mr. Becerra's question whether Mr. Buffett was 
talking about marginal tax rates or whether he was talking 
about average tax rates. What you are reporting are all what we 
refer to as average tax rates, taking total amount of tax paid 
and dividing it by your total income.
    Representative Camp. Well, frankly, Mr. Buffett needs to 
give his secretary a raise. But, I also want to talk about the 
comparisons in income of salary versus capital gains, and they 
are different, aren't they?
    Mr. Barthold. One is return to investment, the other is 
return to labor effort.
    Representative Camp. And in common parlance, one is taxed 
twice?
    Mr. Barthold. Capital gains from equities, from stock, the 
growth in the value that gives rise to the gain is in most 
cases from increased earnings by the business, and the business 
is taxed at the business level, as you noted. You can also have 
capital gains on other capital assets that are not in corporate 
form.
    Representative Camp. But for the average American in terms 
of the rhetorical discussion here, capital gains is taxed 
twice, salaries are not. Now, salaries are deductible by 
business entities, are they not?
    Mr. Barthold. That is correct.
    Representative Camp. And that is another difference; is 
that correct?
    Mr. Barthold. Well, that is your single level of tax.
    Representative Camp. Right. So the comparison of the two is 
not actually comparing two like commodities or two like things, 
which is the point I wanted to make. So I appreciate your 
comments, and I appreciate the work that the Joint Committee on 
Taxation does analyzing tax data. It does track what the IRS 
and the Congressional Budget Office are also saying about 
average tax rates paid by both middle income and high income 
Americans. So thank you for your testimony.
    I yield back.
    Mr. Barthold. Thank you, Mr. Camp.
    Chairman Hensarling. Congressman Van Hollen of Maryland is 
now recognized.
    Representative Van Hollen. I thank you, Mr. Chairman. We 
are talking about averages of averages. In other words, average 
tax rates for average taxpayers over certain income levels. One 
of the ideas of trying to make this fair is to make sure that 
no individual taxpayer can take advantage of a lot of special 
preferences, and I would point out that the top 400 richest 
Americans, all making over $110 million per year and making an 
average of $271 million a year, paid only 18 percent of their 
income in income tax in 2008, the effective rate.
    But what I really want to turn to is the larger 
conversation about tax expenditures that has been discussed by 
many tax experts for a long time but has gotten more popular 
discussion as a result of Simpson-Bowles and some of the other 
commissions that have looked at this. And there are a number of 
ways to deal with the tax expenditure issue. One is to look 
them over and decide to eliminate them or a subset of them. 
That could be used to reduce the deficit, raise revenue, and 
also to buy down rates.
    Another way to do it is along the lines of one of the 
proposals the President made, which is for higher income 
earners, for example at the 35 percent rate you would say their 
deductions, regardless of what specific deduction it was, would 
get the 28 percent deduction level as opposed to 35 percent so 
that higher income individuals weren't getting, you know, a 
disproportionate benefit from the deduction.
    A third way, and this is what I want to focus on, is to not 
look at any particular deduction but to find a way to limit the 
overall number of deductions. Then you don't have to 
necessarily get in a fight over whether this has important 
social policy or another policy. One way that has been done in 
the past was something named after former Congressman Pease, 
Don Pease, which is still an aspect of the Tax Code which sort 
of phases out your deductions based on your income, and one of 
the concerns that have been raised by some people about that, 
including some of our Republican colleagues, is it changes 
indirectly your marginal, your top marginal rates.
    But there is another way to go about this, and I want to 
explore that, and this is in the interest of searching for 
common ground, and Martin Feldstein, who was of course the 
Chairman of the Council of Economic Advisers under President 
Reagan, has written about this. He has written about it in The 
Wall Street Journal, the headline of the article, ``The Tax 
Expenditure Solution to Our National Debt;'' written about it 
in The Washington Post, headline ``How to Cut the Deficit 
Without Raising Taxes;'' and I do want to just read a portion 
of his article.
    It says, ``There is a way to cut budget deficits without 
raising taxes. Tax expenditures are the special feature of the 
U.S. income tax law that subsidize a variety of things,'' and 
he says ``with respect to the Simpson-Bowles proposals, their 
most extreme suggestion is to eliminate all tax expenditures 
raising a trillion dollars a year in tax revenue, and then use 
all but $80 billion of that to cut taxes.'' He goes on to 
comment, ``I think that devotes too little money to deficit 
reduction at a time when fiscal deficits are dangerously 
large,'' and then he goes on to present another alternative 
because, as you pointed out, there may be tax expenditures that 
whether for policy or political reasons people aren't going to 
want to go after. So rather than picking one, he says ``let's 
try and get at this overall issue,'' and here is his practical 
alternative, and I am quoting, ``Congress should cap the total 
benefit taxpayers can receive from the combined effect of 
different tax expenditures. The cap could be set as a 
percentage of an individual's adjusted gross income and perhaps 
subject to an absolute dollar amount.''
    Mr. Barthold, my question to you is, that approach, does it 
address the concerns some have raised with respect to the so-
called Pease approach in that the approach being presented by 
Martin Feldstein does not affect the top marginal rates or the 
marginal rates?
    Mr. Barthold. The short answer is yes. Do you want me to 
explain why?
    Representative Van Hollen. Yes, if you could, because again 
I am offering this in the spirit of common--you know, trying to 
find some common ground here.
    Mr. Barthold. By contrast, the Pease provision basically 
says if you earn more income, I take more of your itemized 
deductions away. So that has the effect, as it is drafted, of 
increasing your marginal rate by 3 percent. So if you were 
otherwise in a 31 percent bracket, your effective marginal tax 
rate on earning additional income, and if you are subject to 
the Pease provision, would be 31 percent.
    Now, what Professor Feldstein has proposed is a cap that is 
based against--on adjusted gross income, and so as you earn 
more income, as your adjusted gross income goes up, the cap 
actually goes up, and so if the cap were binding on some 
taxpayers, the effect of the Feldstein proposal would be to I 
earn an additional $100, well, that will increase my allowable 
deductions by whatever the percentage cap is, so that I maybe 
even increase my deductions a little bit, which means my 
taxable income goes up by $100 or if the cap is binding, 
slightly less than $100. So that leaves the marginal tax rate 
either unchanged or in some cases will reduce it.
    Now, I, too, read The Wall Street Journal op-ed piece by 
Professor Feldstein, and he had proposed a cap of 2 percent.
    Representative Van Hollen. Right.
    Mr. Barthold. Now, most of our States do have State income 
taxes which are deductible against the Federal income tax, and 
the State income taxes are generally at a rate above 2 percent, 
so the State income tax would generally go up and increase your 
itemized deductions, which means it is really sort of a wash. 
You wouldn't get that reduced marginal rate effect, but you 
would be held constant.
    Representative Van Hollen. At the Federal level you could 
actually have a reduction in your marginal tax rate?
    Mr. Barthold. Well, not if you are in a State with State 
income----
    Representative Van Hollen. Okay, and I would just----
    Mr. Barthold. It would never increase the marginal rate.
    Representative Van Hollen. Right.
    Mr. Barthold. It would only hold it constant or reduce it.
    Representative Van Hollen. Thank you. And I just urge my 
colleagues to take a look at this concept.
    Chairman Hensarling. The co-chair recognizes his co-chair, 
Senator Murray of Washington.
    Co-Chair Murray. Thank you very much. I wanted to ask your 
opinion about this notion that tax expenditures are just 
another form of government spending. I have heard Chairman of 
the Federal Reserve, former Chairman Alan Greenspan, Martin 
Feldstein that was just being referred to. Both have argued 
that tax expenditures are simply a difference in form than in-
kind as direct government spending, and I wanted to ask you, 
what is your assessment on whether or not tax expenditures are 
just simply government spending in an alternative package?
    Mr. Barthold. Well, Senator, that is--the construct of the 
tax expenditure is to say where am I doing something special, 
and there is a lot of different ways that government 
policymakers can choose to do something special. I mean, you 
could have a direct subsidy or you could have implicitly a 
subsidy through the Internal Revenue Code. So in that sense you 
think of tax expenditures as spending by another name.
    Now that sort of begs the question of why on policy merits, 
you know, you decided, you know, the Congress decided to do it, 
why they decided to do it this way. In some cases a direct 
spending program could be easier to administer and more 
efficacious, could require fewer rules. It is possible that the 
opposite could also be the case, that it could be, you know, 
easier to administer a tax benefit than, you know, a specific 
new government program.
    So, remember, it is a notion measured against a more, an 
idea of a more theoretically pure income tax and saying where I 
am deviating from that is I am not measuring income correctly 
or I am not measuring income theoretically correctly, and I am 
putting a value to that deviation, and so I could have said, 
here, measure someone's income correctly and then provide a 
subsidy related to whatever the activity is that you wanted to 
do.
    Co-Chair Murray. Okay. Well, we have heard over and over 
and over again about the need to review and reduce redundant, 
wasteful, inefficient government spending. The Budget Control 
Act, which we just did, cuts a trillion dollars over the next 
10 years, that is a very important step in that direction. 
These budget discussions and cuts are impacting directly a lot 
of people now as we try to put together our appropriations 
bills, those of us who are on that committee are watching the 
pain. We have reduced and eliminated programs that benefit 
students, we have cut support for police officers on the 
street, we have reduced support for programs that keep people 
in emergency shelters rather than homeless. I mean, these cuts 
are having an impact.
    However, we have still largely left untouched whether it 
makes sense to keep a whole host of these tax expenditures, 
whether we should continue mortgage interest tax breaks for a 
yacht that qualifies as a second home, whether the entire 
amount of Leona Helmsley's $8 billion charitable bequest for 
the care of her dogs should be left untouched, whether Kentucky 
thoroughbred horses should be given special tax breaks. We 
actually even have a tax credit for employees on former Indian 
lands in Oklahoma, which is now covering two-thirds of that 
State.
    So, you know, maybe some of these tax credits make sense, 
maybe they don't. We have had an intense discussion here about 
earmarks. We have not had an intense discussion about these tax 
expenditures.
    I wanted to ask you if you see any policy reason why we 
could not analyze or consider individual tax expenditures as 
candidates for elimination or modification outside of 
comprehensive reform or do we have to wait for reform of this 
whole system?
    Mr. Barthold. Senator, those sort of decisions are in your 
hands. I mean, the tax writing committees in their oversight 
role are looking at a number of these provisions all the time, 
so I mean, I guess I don't have an answer that is better than 
that for you. You certainly can explore the merits of different 
provisions.
    Co-Chair Murray. Okay, thank you. I yield back my time.
    Chairman Hensarling. The co-chair now recognizes Senator 
Kyl of Arizona.
    Senator Kyl. Just a couple questions, but following up on 
Senator Murray's question, are tax expenditures just another 
form of government spending? In looking at the 10 items listed 
under tax expenditure in your Table 3, isn't it the fact that 
only one of those, the earned income tax credit, is actually 
scored as outlays, government outlays?
    Mr. Barthold. That is true.
    Senator Kyl. Second, relative to Representative Becerra's 
line of questioning, just to put a little bit of an exclamation 
point on this, let's say you are a teacher, you hold some 
stocks or you have got a pension, it has got stocks in 
companies, you get a dividend from that. The value of what you 
receive is affected by what the corporation first had to pay in 
its corporate taxes; isn't that correct?
    Mr. Barthold. That is the point.
    Senator Kyl. So the old saw that corporations don't pay 
taxes, people do is actually true, and so when--and I presume 
that Warren Buffet's income is largely derived from passive 
income of one kind or another, dividends, capital gains, 
whatever other kind of corporate earnings there may be on his 
significant investments. So to really calculate what he pays in 
taxes, you would also have to know what the companies that he 
is invested in have paid in the way of corporate income taxes, 
would you not?
    Mr. Barthold. To figure out the full burden.
    Senator Kyl. And that is true of anybody else with 
investment, with stock investments, for example?
    Mr. Barthold. Yes.
    Senator Kyl. Thank you very much.
    Co-Chair Murray [presiding.] I will yield to Senator 
Portman.
    Senator Portman. Thank you, Madam Chair. I would like to, 
if I could, dig a little deeper on the individual side now that 
we are over there, and I would go back to the basic question, 
you know, what should the burden be, we have talked about that, 
of taxation on a weak economy, and then what is the best 
system.
    Looking at your testimony, starting on page 35 you talk 
about the Simpson-Bowles approach, and you make the point that 
some of the revenue estimations from the Joint Committee on 
Taxation are going to be different than some of the general 
reporting from the Simpson-Bowles committee because there are 
some interactions between some of these tax preferences.
    However, my general question for you is, have you all had 
the opportunity to do an analysis, to do a revenue estimate of 
the Simpson-Bowles proposals? I know it is a menu, in essence. 
If you could answer that, it would be helpful.
    Mr. Barthold. Well, the short answer, Senator, is no, and 
that is for the one reason that I elaborated on in the 
testimony, and that is because underlying the idea of 
eliminating tax expenditures is, need some policy calls on, you 
know, what the Members intend to do, what effective date the 
repeal mortgage interest deduction, would it be just for new 
mortgages or would it be for all?
    Senator Portman. I didn't provide you enough specificity to 
be able to come up with a score, but you could come up with a 
score if certain decisions were made on timing?
    Mr. Barthold. There is a long--if decisions were made, we 
would get to work, but there are a lot of decisions to be made.
    Senator Portman. But do you disagree with their menu? In 
other words, do you think that their analysis is accurate as to 
the various rates that you could get to based on the reduction 
of certain preferences?
    Mr. Barthold. Well, I think I have to disagree some. What 
they are saying is if you gave, you know, if you started with 
several hundred billion dollars over, let's say, you know, a 
10-year period, that that would enable you to achieve, you 
know, X percentage point reduction in individual rates. That 
part of the analysis is probably, you know, reasonably 
consistent with the analysis that we would do.
    The point that I was making was that you can't take this, 
my top 10 list here and add it up and say, ah, that money is 
available to reach that same amount of----
    Senator Portman. Because there will be transitions, there 
will be some timing issues.
    Mr. Barthold. Well, not just transition, but our tax 
expenditure calculations do not account for taxpayer behavior 
that would occur if you eliminated them.
    Senator Portman. Right, some of the interactions. Well, I 
think that would be very helpful, if we could give you some 
more specificity as to timing and specifically, you know, which 
preferences we are talking about because those sorts of scores 
are very valuable. I know you have done some of this for 
Senator Wyden and his good work, he did with Judd Gregg last 
year and with Senator Coats this year, I know you have some 
joint tax estimates on both the individual and corporate side 
there; is that correct?
    Mr. Barthold. Well, you know, officially we never comment 
on any work that we do for any individual Member, but if 
Senator Wyden told you that we did work for him, I am sure we 
did.
    Senator Portman. I just revealed a great secret here. My 
point is simply that there has been a lot of work done on the 
impact of some of these changes and preferences and how it 
would affect rates.
    Mr. Barthold. We have done work on a number of provisions 
that are like a number of things that people want to look at 
when they talk about modifying tax expenditures, but, again, it 
matters a lot what you want to do.
    Senator Portman. Quickly, can we talk about AMT for a 
second? Can you tell us what the cost is of eliminating AMT 
over the next 10 years under the current law baseline?
    Mr. Barthold. Yeah. I think we are a little bit above $1.1 
or $1.2 trillion.
    Senator Portman. Okay, and is that with or without 
extension of the tax cuts? Are you talking current policy or 
current law? Are you talking about under the current law 
baseline?
    Mr. Barthold. That is under present law, which assumes that 
the current----
    Senator Portman. Elimination of all the Bush tax cuts?
    Mr. Barthold. Well, that the current--yes, that is letting 
EGTRRA/JGTRRA expire and also the current AMT patch would 
expire.
    Senator Portman. Which affects the AMT costs, correct?
    Mr. Barthold. That is correct. There is interaction----
    Senator Portman. What about a patch, what is a patch under 
the scenario of current law assuming that we are--it is about 
600, 650?
    Mr. Barthold. I don't recall. I think it is closer to $800 
billion.
    Senator Portman. Okay, and that again assumes--that sounds 
like it might assume that the top two rates do not expire or 
does that assume current law?
    Mr. Barthold. Under--I think that is under current law, 
yeah.
    Senator Portman. Okay, we would love to have those numbers. 
I think there is a consensus on the committee here that we want 
to look at least at the idea of patching the alternative 
minimum tax for all the reasons we talked about today.
    Mr. Barthold. We will provide all the members with an 
estimate of--when you say the patch, would you propose just 
indexing the current----
    Senator Portman. As Congress has done over the last 
several----
    Mr. Barthold. Well, Congress has done it three different 
ways. We will come up with something for you.
    Senator Portman. Okay. And in terms of AMT, have you also 
looked at the impact on your macroeconomic analysis we talked 
about earlier? In other words, if you keep the Tax Code as it 
is and allow the AMT to hit another 20 or 30 million Americans, 
what would the impact be on the macroeconomic side, including 
GDP?
    Mr. Barthold. Some of the AMT effect has been built in to 
past work that we have done. Since the AMT is part of present 
law, the way our macroeconomic analysis is undertaken is we 
take our conventional modeling analysis and use that to 
determine what the effective marginal tax rates are on 
different classes of taxpayers, on wage income, on their return 
to saving. So that is built in.
    If your specific question is if we--have we done an 
analysis that says maintain present law except for some change 
in the AMT, no, we have not done such a macroeconomic analysis 
isolating on----
    Senator Portman. Okay. Thank you, Madam Chair.
    Co-Chair Murray. Thank you. Senator Kerry.
    Senator Kerry. I was reminded a little while ago, somebody 
mentioned the Tax Reform Act of, I guess, 1986, the rates at 70 
percent, I had the pleasure of voting to get rid of the 70 
percent and come down to--I think originally we chose two 
rates, as I recall it was 28 and 14 under the Reagan proposal.
    Mr. Barthold. 14 and 28.
    Senator Kerry. Yes, and then we found we couldn't make it 
work, there wasn't sufficient revenue, et cetera, and we popped 
it up to the 33, and then there were sort of these incremental 
changes, so we have had some experience with this process.
    What I would like to ask you first of all is, the tax 
expenditures are substantially higher today, are they not, than 
they were immediately after the Tax Reform Act of 1986?
    Mr. Barthold. Senator Kerry, tax expenditures, remember it 
is a measure of the value of, for example----
    Senator Kerry. Well, both in total size and as a percentage 
of tax receipts, they are substantially higher than they were 
immediately after 1986?
    Mr. Barthold. Well, one--a nuance I want to put to that is 
the calculation of the tax expenditure depends upon the tax 
rates. Since tax rates today are higher than they were 
immediately after the 1986 act, absent anything else, the 
measure of tax expenditure----
    Senator Kerry. But the tax expenditure per se hasn't been 
responsible for the growth? It is not the tax expenditure that 
has suddenly changed; it is other things, is it not? Choices we 
made about what to provide as a preference, perhaps?
    Mr. Barthold. And that is what the last figure in my short 
packet, you know, indicated was that Congress has made policy 
decisions.
    Senator Kerry. Exactly, and I want to come to that for a 
minute because I think it is important for all of us to connect 
those. I think we have got to understand the relationship 
between those choices, that the actual tax expenditure itself 
post-1986 is substantially the same as the one we have today, 
but other things have happened. For instance, are some of the 
growth of tax expenditures attributable to the increase in the 
tax rates?
    Mr. Barthold. Yes, that was the point I was just making, in 
terms of measuring the value.
    Senator Kerry. So that is one increase. Another increase, 
didn't we contribute to them relatively substantially when we 
passed the preferential treatment on capital gains and 
dividends?
    Mr. Barthold. That is one of the larger tax expenditures.
    Senator Kerry. That increased that expenditure?
    Mr. Barthold. Yes.
    Senator Kerry. Likewise, the incentive on retirement 
savings?
    Mr. Barthold. Retirement savings, as I noted here, it makes 
our top 10 list.
    Senator Kerry. Right. And in total those are the things 
that have most substantially contributed to the growth of the 
tax expenditures, the policy choices we made?
    Mr. Barthold. The policy choices that Congress has made are 
the factor that make, that have changed the tax expenditure 
budget. I will note that we did include in the appendix to the 
submitted testimony a list of all the tax expenditure items 
added since the 1986 act.
    Senator Kerry. Right, and that is very helpful, and I think 
we need to bear through it. What I want to bear down on, Dr. 
Barthold, is all of the major proposals--I mean, I consistently 
hear colleagues on both sides of the aisle, and I share this, 
it would be great if we could simplify, it would be great if we 
could create pro-growth outcome, it would be terrific if we 
could broaden the base and reduce the rates. I think that--are 
those worthy goals that we ought to be pursuing?
    Mr. Barthold. Improved efficiency, more growth, it all 
sounds pretty----
    Senator Kerry. Right. Now, most of the proposals to do 
those kinds of things envision reducing the sort of six 
marginal rates, bring them down to three rates, and that is 
what you hear most often, and a lower rate, corporate rate, the 
25 percent seems to be the one that is sort of ringing bells 
these days. Is it possible, in your judgment, to structure a 
system that lowers the rates, broadens that base, and improves 
progressivity and creates growth in your judgment? Can you 
envision that based on your experience all these years in doing 
this?
    Mr. Barthold. It is feasible. You know, as a tempering 
factor, you remember that it is often the case in policy-making 
that goals will be in conflict. Reducing tax rates sometimes is 
in conflict with reducing what you perceive to be the overall 
fairness or equity of outcomes. Improving efficiency can mean 
that sometimes things are made more complicated rather than 
less complicated. So there can be lots of trade-offs. There is 
lots of different policy decisions. But it is a worthy thing to 
try.
    Senator Kerry. Is it--well, in 1986, for instance, we tried 
to get really super simple, we created those two rates, but 
then we had that tax bubble that got created as a result. Can 
you sort of just as a matter of helping people understand the 
difficulty here just talk about that for an instance, of how 
that bubble came about?
    Mr. Barthold. How the bubble came about?
    Senator Kerry. Yes.
    Mr. Barthold. The bubble----
    Senator Kerry. What I am getting at is, can we create a 
system where you have two or three rates and you don't create a 
bubble?
    Mr. Barthold. The bubble sort of--remember the bubble was 
marginal, was about marginal rates. What the bubble did was it 
phased out the benefit of the standard deduction and the lower 
rates if you were above certain income levels. So while the 
bubble had this range of income over which the marginal rate of 
tax was 33 percent and then the marginal rate of tax dropped 
down to 28 percent, the effect of the bubble, by eliminating 
essentially to such a taxpayer the benefit of a zero rate of 
tax, the standard deduction or the personal exemption or the 14 
percent bracket, had the effect of by the time you were at the 
end of the bubble, your average tax rate was 28 percent, but 
everywhere in the bubble your average tax rate was less than 28 
percent, less than 28 percent but increasing. So the bubble 
promoted overall progressivity but had the appearance--well, it 
didn't have the appearance, it had the actual effect of a 
marginal tax rate of 33 percent for someone in the bubble range 
and then the marginal tax rate dropped back down to 28 percent 
beyond the bubble range. But the person beyond the bubble range 
had a higher average tax rate than a person in the bubble or a 
person beneath the bubble.
    Senator Kerry. So it is all very simple. We will get there.
    Mr. Barthold. I hope that was responsive. It was sort of a 
technical point.
    Senator Kerry. No, it is an important point and I 
appreciate it. Thank you.
    Co-Chair Murray. Senator Toomey.
    Senator Toomey. Thanks very much, Madam Chairman. I want to 
go back to the topic of capital gains because I just think this 
is very, very important, and the one observation that I want to 
make is that I think it is abundantly clear that it is the 
investment of accumulated capital that makes economic growth 
possible, and any policy that diminishes that accumulated 
capital is very, very dangerous in terms of its implications 
for economic growth. Congressman Camp and Senator Kyl both 
observed that when capital gains are imposed on the appreciated 
value of a stock, it is almost certainly a form of double 
taxation because the underlying stock has been--had the income 
associated with it taxed in the first place, and that is 
certainly completely true.
    I would like to make another point about this which has to 
do with inflation. Mr. Barthold, I am sure you would agree that 
in the post-war era our economy has had no sustained periods of 
deflation. We have had inflation of varying levels, but 
consistently. And we charge, we impose a capital gains tax on a 
nominal gain in value of an asset, not on the real gain. So 
that is to say that we impose the capital gains tax on the 
inflationary gain. Is that true?
    Mr. Barthold. Yes, it is correct. We tax nominal values 
throughout the Internal Revenue Code.
    Senator Toomey. So if you had a sustained period where 
inflation averaged just 3 percent, as the math works out in 24 
years, the value of assets doubles. I shouldn't say the value, 
the nominal price doubles, but yet the real value hasn't gone 
up at all in that scenario, and yet we would still impose a 
capital gains tax, wouldn't we?
    Mr. Barthold. That is correct.
    Senator Toomey. So, in effect, what we are doing in the 
case of assets that appreciate in value, if the appreciation 
were due only to really the loss of value of the dollar and 
inflation, you would have zero real gain, and yet you would pay 
a tax, so you would literally be paying a tax, despite having 
no gain in real terms; isn't that true?
    Mr. Barthold. That is correct, sir.
    Senator Toomey. So it seems to me that this phenomenon has 
long been part of the reason that at least we try to mitigate 
that by having a capital gains rate that is lower than ordinary 
income tax rates, just one of the rationales?
    Mr. Barthold. That has been one of the stated policy 
rationales, sir.
    Senator Toomey. Thanks, and I will yield the balance of my 
time.
    Co-Chair Murray. Thank you very much. Under our agreement 
we had agreed that each member would have an additional minute. 
But, Mr. Barthold, you have been generous with your seat time 
here. In the interest of being a good example, I will yield 
back my time.
    Representative Becerra, do you have one additional 
question?
    Representative Becerra. I do, I will make use rapidly of my 
one minute.
    Mr. Barthold, very interesting here because I think 
everyone would agree that the Tax Code is neither simple or 
transparent, and the reality is that complexity, the opposite 
of simplicity, is what helps people hide what they should pay 
in taxes, and so if you have complexity and at the same time 
you don't have transparency, which is, acts like complexity in 
helping you hide your income, you can get away without paying 
what would be your otherwise fair share.
    Now, it is really fascinating the way we treat corporations 
because there is this concern that we tax twice income that 
comes from a corporation because ultimately the individual is 
the one that pays the taxes. Are any Americans forced to form a 
corporation?
    Mr. Barthold. No, sir. Corporate is an elective form of 
business.
    Representative Becerra. Right. So if it is so bad, why are 
so many people forming corporations? Because they get certain 
benefits by doing so, whether it is on the tax side or 
otherwise. So I think we have to recognize that complexity and 
transparency, whether it is on the corporate side or individual 
side, should be removed so we can truly understand how we get 
to a fair Tax Code.
    I yield back.
    Co-Chair Murray. Representative Van Hollen.
    Representative Van Hollen. Thank you, Madam Chairman. Just 
to pick up on Mr. Becerra's question, because we have heard a 
lot about the double taxation of capital gains, but isn't it 
true that there are many assets that get the preferred 15 
percent capital gains rate that are not subject to another 
layer of taxation, real estate, commodities, S corporations; 
isn't that true?
    Mr. Barthold. Yes, I made that point briefly when Mr. Camp 
was discussing the issue.
    Representative Van Hollen. Do you have any idea, you know, 
how that compares in magnitude to the overlapping?
    Mr. Barthold. Off the top of my head, I don't. Our staff 
has looked at that, and I can report from--back to the 
committee on, from what--the IRS creates a sale of capital 
asset files where we get some detailed information on what sort 
of assets do people realize in reporting capital gains. We will 
run some tabulations on the SOCA file, and I will make that 
available to the members of the Joint Select Committee.
    Representative Van Hollen. Thank you, Mr. Barthold. Thank 
you.
    Co-Chair Murray. Thank you very much. I want to thank the 
witness today for participating and all of our members who were 
here today as well. I remind all of our members that they have 
3 business days to submit questions for the record, and I would 
ask the witness to try and respond as quickly as possible. So 
all of our members should submit their questions by the close 
of business on Tuesday, September 27th, and with that without 
objection, the joint committee stands adjourned.
    [Whereupon, at 1:45 p.m., the committee was adjourned.]


       OVERVIEW: DISCRETIONARY OUTLAYS, SECURITY AND NON-SECURITY

                              ----------                              


                      WEDNESDAY, OCTOBER 26, 2011

                        United States Congress,    
                                 Joint Select Committee    
                                      on Deficit Reduction,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m., in Room 
SH-216, Hart Senate Office Building, Hon. Patty Murray [co-
chairman of the committee] presiding.
    Present: Senator Murray, Representative Hensarling, Senator 
Baucus, Representative Becerra, Representative Camp, 
Representative Clyburn, Senator Kerry, Senator Kyl, Senator 
Portman, Senator Toomey, Representative Upton, and 
Representative Van Hollen.

  OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM 
  WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Chairman Murray. This committee will come to order.
    Before we begin, let me just remind all our guests that the 
manifestation of approval or disapproval, including the use of 
signs or placards, is a violation of the rules, which do govern 
this committee. So I want to thank all of our guests in advance 
for their cooperation in maintaining order and decorum.
    First of all, thank you to my co-chair, Representative 
Hensarling, all of my fellow committee members, and Dr. 
Elmendorf for joining us here today, as well as the members of 
the public here in person or watching us at home.
    This committee has been working very hard over the last few 
weeks to come together around a balanced and bipartisan plan to 
reduce the deficit and rein in the debt. We have heard from our 
colleagues. We have heard from the standing House and Senate 
committees, from groups around the country, and close to 
185,000 members of the public through our Web site, http://
www.deficitreduction.gov.
    We continue our work now today with a hearing on 
``Discretionary Outlays, Security and Non-Security.'' And I am 
glad we are talking about this today because it is important 
for us to understand how these policies fit into our overall 
deficit and debt.
    Nondefense discretionary spending represents less than one-
fifth of total Federal spending. Listening to the debates here 
in D.C. over the last few months, you would think this small 
piece of pie was a whole lot bigger. As I expect, we will hear 
more about that from Dr. Elmendorf today.
    Congress has gone to this relatively small pot with cuts 
and spending caps again and again while leaving many other 
pieces of the budget essentially untouched, including the law 
that created this joint committee, which cut roughly $800 
billion in discretionary spending. And all the focus on this 
one area is especially striking, given that we are spending 
about the same on nondefense discretionary programs in 2011 as 
we did in 2001. Meanwhile, mandatory programs increased, 
defense spending increased, and revenues plummeted.
    So as this committee works together on a bipartisan plan to 
reduce the deficit, we need to keep in mind the cuts that have 
already been made, the role discretionary spending plays in our 
overall deficit and debt problem, and the impact irresponsible 
slashing could have on our economic recovery and middle-class 
families across the country. As we all know, these aren't just 
numbers on a page. They affect real people in real ways.
    When food assistance for women and infants is cut, that 
means greater challenges for struggling families. When 
infrastructure investments are shelved, that means fewer jobs 
and more crumbling bridges and roads. And when research, 
education, and student loans are slashed, that means fewer 
opportunities for our businesses and the next generation of 
workers, which is really no savings at all since we end up 
paying for it in the future.
    So while we should certainly examine every piece of the 
budget to see where we can responsibly make additional cuts, it 
doesn't make sense to simply keep going after one small part of 
the budget that disproportionately affects middle-class 
families and the most vulnerable Americans. There has to be 
balance.
    Today, Dr. Elmendorf will be discussing discretionary 
security spending, which has grown significantly in the years 
since 9/11. This is an area where the stakes for our Nation are 
high. From both a national security as well as a budgetary 
perspective, we have to get this right.
    As many of my colleagues have noted over the past few 
weeks, it is an area that would be hit especially hard if this 
committee doesn't come to a deal, and we move to sequestration. 
So I am looking forward to a robust conversation today with Dr. 
Elmendorf about these critical pieces of our Federal budget.
    And before I turn it over to my co-chair, I just want to 
say that over the last few weeks, this committee has been 
working very hard to find common ground and a path toward a 
balanced and bipartisan plan that can pass through this 
committee, through Congress, and get signed into law. We aren't 
there yet, but I am confident that we are making progress. And 
I am hopeful that we are moving quickly enough to meet our 
rapidly approaching deadline.
    As I said from the start, if this committee is going to 
work--and I believe that it must--we all need to be willing to 
make some tough decisions and real compromises. I am willing to 
do that, and I know many of my colleagues are as well.
    Every day, we hear more and more about the effects of 
failure that would be on our Nation's long-term fiscal health 
and credit-worthiness. Over the next few weeks, it is going to 
be up to all of us to demonstrate to the American people that 
we can deliver the kind of results that they expect and that 
they deserve.
    [The prepared statement of Chairman Murray appears in the 
appendix.]
    With that, I would like to recognize my co-chair, 
Representative Hensarling, for his opening statement.

 STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE FROM 
TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT REDUCTION

    Co-Chair Hensarling. Well, I thank the co-chair for 
yielding, and I want to thank her again for her leadership on 
this committee and the spirit of negotiation that she brings.
    There is no such thing as an unimportant hearing when it 
comes to dealing with our Nation's structural debt crisis. And 
certainly, within our Nation's discretionary budget are 
contained many challenges and, frankly, many important 
priorities that have to be debated and negotiated.
    Not the least of which is what many of us view as the 
number-one function of our Federal Government, and that is to 
protect us from all enemies, foreign and domestic, and 
specifically, our National defense budget, which continues to 
shrink as a percentage of our economy, shrink as a percentage 
of our budget, as we continue to live in a dangerous world.
    When I look at the totality of our discretionary budget, I 
do, again, find some common ground with my co-chair. And again, 
although there is no such thing as an unimportant hearing or 
unimportant section of the budget, in many respects, today we 
may be debating the pennies, nickels, and dimes in a debt 
crisis that is demanding half dollars and dollar bills.
    There has been huge run-ups in our discretionary spending 
since the President has come to office. This is not the forum 
to debate the policies, but I think the numbers speak for 
themselves.
    Without the stimulus program, the Commerce Department has 
increased from '08 to '10 102.9 percent. Without the stimulus, 
EPA has increased 35.7 percent. Subtracting the stimulus, 
Housing and Urban Development increased 22.2 percent. State 
Department without the stimulus, up 132.2 percent, and the list 
goes on.
    Again, it is not at this forum to debate these particular 
policies, but it is important to note the numbers that when 
these particular budgets are growing, the family budget, which 
pays for the Federal budget, has, unfortunately, contracted. 
And it is the family budget that has to pay for the Federal 
budget.
    As an order of magnitude, we know that the discretionary 
spending of our Nation is roughly 40 percent and shrinking. Our 
entitlement spending is roughly 60 percent of the budget and 
growing. We know outside of interest payments on our National 
debt that our mandatory spending is principally driven by our 
healthcare and retirement programs that are simultaneously 
starting to disserve their beneficiaries and driving the Nation 
broke as they grow at 5 and 6 and 7 percent a year, where, 
unfortunately, our Nation, over the last few years, have 
actually seen negative economic growth.
    So, to put this in even a larger context, under the Budget 
Control Act, we collectively have a goal, a goal of $1.5 
trillion in deficit reduction. But we have a duty, a duty to 
provide recommendations in legislative language that will 
significantly improve the short-term and long-term fiscal 
imbalance of the Federal Government.
    Thus, the challenge before us remains that we must find 
quality healthcare solutions, quality retirement security 
solutions for our Nation at a cost that does not compromise our 
National security, does not compromise job growth and our 
economy, and does not mortgage our children's future.
    Everything else we do, including dealing with the 
discretionary budget, will be helpful. Nothing else will solve 
the structural debt crisis or allow this committee to meet its 
statutory duty, only these reforms. And so, prudent stewardship 
of our discretionary budget is going to be helpful. It alone 
cannot solve the crisis. It continues, though, to be an 
important matter.
    I look forward to hearing from our witness, and with that, 
I will yield back, Madam Chairman.
    [The prepared statement of Co-Chair Hensarling appears in 
the appendix.]
    Chairman Murray. Thank you very much.
    With that, I will turn it over to Director Elmendorf for 
your opening statement. And we all appreciate your taking the 
time out of what we have given you as a very busy life, to take 
time to come today and answer our questions. So thank you very 
much, Dr. Elmendorf. Turn it over to you.

            STATEMENT OF DOUGLAS ELMENDORF, PH.D., 
             DIRECTOR, CONGRESSIONAL BUDGET OFFICE

    Dr. Elmendorf. Thank you, Senator Murray, Congressman 
Hensarling. I and the other folks at CBO are happy to be trying 
to help this committee in its very challenging task.
    To all the members of the committee, my comments today will 
focus on four questions that are addressed in the written 
testimony. First, what does discretionary spending comprise? 
Second, what has been the historical trend in discretionary 
spending? Third, how will discretionary spending evolve over 
the next decade under current law? And fourth, how might the 
path of discretionary spending be altered?
    Before digging into that substance, though, let me briefly 
clarify some of the terms I will use. When I talk about 
discretionary funding, I am adding together the budget 
authority that is appropriated for those programs and the so-
called obligation limitations that govern spending for certain 
transportation programs. Those two types of funding provide 
agencies with the authority to spend money. When the funds are 
actually disbursed, they become outlays.
    Also, through the testimony, I will focus on defense and 
nondefense discretionary spending, rather than security and 
non-security spending. Defense spending is a traditional 
category that includes all of the spending on military 
activities of the Department of Defense, plus spending for the 
Department of Energy's atomic energy defense activities and 
some defense-related activities of other agencies. Nondefense 
spending is everything else in the discretionary category.
    The Budget Control Act sets caps on discretionary spending 
for 2012 and 2013 using different categories, security and non-
security, where security includes most, but not all of defense 
and also includes appropriations for the Department of Homeland 
Security, the Department of Veterans Affairs, and the 
international affairs budget category.
    However, in 2014 and beyond, the Budget Control Act 
specifies a single cap on discretionary funding. There is an 
entirely different set of caps in the law that would come into 
play if legislation from this committee does not generate 
sufficient deficit reduction. In that case, the further cuts in 
spending that would be required are based on the traditional 
defense and nondefense categories. Although to make the 
situation truly confusing, the act labels those security and 
non-security as well. We thought it would be most useful for 
this testimony to focus on the familiar defense and nondefense 
categories.
    Let me now turn to the first substantive question, which is 
what discretionary spending comprises. In fiscal year 2011, 
total funding for discretionary programs was about $1.3 
trillion, of which more than half went to defense and less than 
half went to nondefense programs. If you turn now to the second 
page of the handouts in front of you, you will see a big donut 
that is labeled ``Defense Discretionary Funding for 2011.''
    Of total defense funding for 2011, 43 percent, the biggest 
piece on the right of the donut, went to operation and 
maintenance, which pays for the day-to-day activities of the 
military, the training of military units, the majority of costs 
for the military's healthcare program, and compensation for 
most of DoD's civilian employees. Another 22 percent of defense 
funding went to compensation of military personnel, including 
pay and housing and food allowances.
    Procurement, representing 18 percent, funds the purchase 
and upgrade of weapons systems. Appropriations for the wars in 
Afghanistan and Iraq and related activities accounted for about 
a quarter of total defense funding. They were distributed 
across the categories shown here, are included in the amounts 
reported.
    If you turn to the next page of the handout, it shows a 
comparable picture for nondefense discretionary funding for 
2011. Seven broad categories accounted for about 80 percent of 
the total. Education, training, employment, and social services 
programs together claimed 16 percent. Transportation programs 
received 15 percent of the total, with about half of that going 
to highway programs.
    Income security programs, mostly for housing and nutrition 
assistance, represented 11 percent. That amount does not 
include unemployment compensation, food stamps, or temporary 
aid to needy families because they are all part of mandatory 
spending.
    Discretionary appropriations for veterans benefits, 
primarily for the Veterans Health Administration, were 10 
percent of total nondefense discretionary funding last year. 
Health was another 10 percent, with about half of that amount 
devoted to the National Institutes of Health.
    International affairs and the administration of justice 
were each about 9 percent, and a collection of smaller 
categories makes up the remaining 20 percent.
    Looking at nondefense discretionary spending as a whole, 
about one-third is disbursed in grants to State and local 
governments. Of those grants, about a third are devoted to 
education and training programs and a quarter to transportation 
programs, with the remainder going to environmental protection, 
law enforcement, economic development, and various other 
purposes.
    Let me now turn to the second question in the testimony, 
which is the historical trend in discretionary spending. This 
is depicted in the next page of the handout.
    Discretionary spending declined noticeably as a share of 
GDP from the early 1970s to 2000, mostly because defense 
spending declined relative to GDP from about 8 percent in 1970 
to a low of 3 percent between 1999 and 2001. Defense spending 
then climbed again.
    Outlays for nondefense discretionary programs have averaged 
about 4 percent of GDP during the past 40 years, with 
considerable variation, as you can see, but no evident trend. 
Thus, on average, such outlays increased during that period 
roughly in line with the size and income of the population.
    Nondefense discretionary outlays were elevated in the past 
few years in part, as has been noted, because of funding from 
the 2009 Recovery Act.
    Altogether, discretionary spending amounted to about 9 
percent of GDP in the past 2 years, higher than the 6 percent 
in 2000, but lower than the 11 to 12 percent of the early 
1970s.
    The third question addressed in the testimony is how 
discretionary spending will evolve over the next decade under 
current law. To illustrate the potential impact of the caps on 
discretionary appropriations set in the Budget Control Act and 
the automatic enforcement procedures contained in that act, we 
projected appropriations under several different assumptions, 
including the three listed on the next page of the handout.
    I apologize for those who don't have the handout. I think 
that members of the committee should have it in front of them. 
For other people, I am referring to figures and tables that are 
in the written testimony, and there are a couple of slides that 
are words also from the written testimony. Nothing I am saying 
is new and is not in that testimony.
    The largest numbers that we looked at, about $12 trillion 
over the next decade, would come from extrapolating funding for 
2011, adjusted for inflation. That is the way CBO constructed 
its baseline projections in recent years before the caps in the 
Budget Control Act.
    The next set of numbers I will talk about assumes that 
funding is equal to the new caps set in law, about $11.3 
trillion over the decade. For illustrative purposes, I will 
focus in a moment on the scenario under which the caps are met 
through proportional reductions in defense and nondefense 
spending. But many other combinations are possible, and the 
written testimony offers a range of possibilities.
    And the third and smallest numbers I will talk about, 
totaling $10.4 trillion, incorporate the sequestration and 
reduction in caps that we estimate would occur if no savings 
resulted from the work of this committee.
    The next page of the handout is Table 3 from the written 
testimony and deals with defense spending. I will focus on just 
the two rows of numbers near the bottom highlighted in blue.
    I want to emphasize that the caps on defense spending do 
not constrain appropriations for the war in Afghanistan or for 
similar activities. And the automatic enforcement procedures 
would not affect funding for such purposes either. So what you 
are seeing here are numbers for the base defense budget.
    The upper of those two blue rows shows the reduction in 
defense spending moving from the path where the amount of 
funding in 2011 has grown with the rate of inflation to a path 
of proportional reductions in defense and nondefense spending 
funding to meet the caps. Between 2012 and 2021, such 
reductions would total $445 billion, the number shown at the 
far right end of the blue bar, or about 7 percent.
    The lower of the two blue rows shows the larger reductions 
in defense funding and moving from the path where the amount of 
funding jumped off 2011 and grew with the rate of inflation to 
the path that would occur if this committee's work resulted in 
no savings. Between 2012 and 2021, the cumulative reductions on 
this path would total $882 billion, or 14 percent. In 2021 
alone, defense funding, excluding war funding, would be $110 
billion, or 16 percent, lower than it would be if such 
appropriations kept pace with inflation.
    If you skip the next page of that handout, which is a 
continuation of the table, the figure beyond that shows defense 
spending as a share of GDP. The light blue line on the left-
hand side shows the history of funding for the base defense 
budget. The middle line on the right with the short dots shows 
our projection, assuming proportional cuts in defense and 
nondefense spending to meet the caps. The lowest line shows our 
projection if the maximum automatic reductions are triggered.
    Under those two assumptions, in 2021, funding for defense, 
excluding war funding, would represent 2.7 or 2.5 percent of 
GDP, compared with an average of 3.4 percent during the past 
decade.
    The next page of the handout is Table 4 from the written 
testimony and deals with nondefense spending. Again, I will 
focus on just the two rows of numbers highlighted in blue.
    The upper of the two blue rows shows the reduction in 
nondefense funding again and moving from the path where 2011 
funding grew with the rate of inflation down to the path that 
would result if the caps were met through proportional 
reductions on the defense and nondefense sides. Between 2012 
and 2021, such reductions would total $418 billion, or 7 
percent.
    The lower of the two blue rows again shows the larger 
reductions in this time nondefense funding moving from this 
inflation-adjusted path to the path if no savings result from 
the work of this committee. Between 2012 and 2021, the 
cumulative reductions would total $794 billion. In 2021 alone, 
nondefense budget authority would be $99 billion, or 15 
percent, lower than it would be if such appropriations kept 
pace with inflation.
    The next page of the handout shows nondefense funding as a 
share of GDP, again Figure 6 from the written testimony. The 
line on the left side shows the history of such funding. You 
can see that nondefense discretionary funding spiked upward in 
2009 but then fell back sharply in the past couple of years to 
roughly its average share of GDP during the preceding decade.
    The upper line on the right shows our projection, assuming 
proportional cuts in defense and nondefense funding to meet the 
caps. The lower line shows our projection if the maximum 
automatic cuts are triggered. Under those two assumptions, in 
2021, nondefense funding would represent 2.8 or 2.6 percent of 
GDP, compared with an average of 4.1 percent during the past 
decade.
    The fourth and last question addressed in the testimony is 
how the path of discretionary spending might be altered. Let me 
make two quick points, which are summarized on the last page of 
the handout.
    First, for some programs, reductions may be particularly 
challenging because funding increases that are greater than the 
rate of inflation would be necessary to maintain current 
policies or plans. For example, implementing the 
administration's multiyear defense plans would require nearly 
$500 billion more defense funding over the coming decade than 
would occur if current funding increased at the rate of 
inflation.
    Other examples where an inflation-adjusted extrapolation of 
current funding would be insufficient to fund current policies 
include veterans healthcare and Pell grants for higher 
education. Moreover, some observers believe that current 
policies in some areas are insufficient to meet the Nation's 
future needs.
    For example, many analysts believe that current national 
spending on infrastructure is inadequate to provide enough 
roads, bridges, and other capital assets to maintain the 
current level of services or to fund all the projects for which 
benefits exceed costs. Of course, if spending on certain 
programs is allowed to grow faster than inflation, then even 
less room under the caps will be available for other 
discretionary activities.
    Secondly, CBO assumes in its baseline projections that 
funding subject to the caps will be equal to the amounts 
currently specified in law for those caps. That means that 
legislation that reduced the funds available for a particular 
discretionary activity or that achieve savings in undertaking a 
particular activity would only reduce projected total 
appropriations if the legislation also lowered the caps. 
Without a reduction in the caps, funding for other 
discretionary activities would probably fill the gap created by 
any specific reduction or savings.
    I hope this information is helpful to you, and I am happy 
to answer any questions that you have.
    Thank you.
    [The prepared statement of Dr. Elmendorf appears in the 
appendix.]
    Chairman Murray. Thank you very much, Dr. Elmendorf. And 
again, thank you for being here today and taking our questions.
    As you know, this committee is working very hard together 
to try and find a balanced plan to reduce our deficit and rein 
in our debt. It is not an easy task. We all believe it is 
necessary.
    Over the past 10 years, domestic discretionary spending has 
remained essentially flat after adjusting for inflation, and 
this spending has remained stagnant despite the growing need to 
have investments to spur job creation and assistance for those 
in our country who have been hit the hardest because of this 
recession.
    In your testimony, you mentioned that discretionary outlays 
during the past decade increased primarily due to the increase 
in security spending after 9/11. So let me start by asking you 
a few questions about the impact of past and potential cuts to 
discretionary spending on our overall budget picture.
    Would you agree that with the negotiations on the fiscal 
year 2011 appropriations bills and discretionary spending caps 
in the recent Budget Control Act, that Congress has already 
made significant efforts to reduce discretionary spending?
    Dr. Elmendorf. Yes, Senator. The current path of 
discretionary spending under existing law is a good deal lower 
than it would have been without the actions you described.
    Chairman Murray. And isn't it the case that even if we 
completely eliminated discretionary funding--everything from 
NIH to elementary and secondary education, military base 
construction, national parks, processing Social Security 
checks--all of it, we would still face deficits of hundreds of 
billions of dollars because we have not addressed entitlements 
and revenues?
    Dr. Elmendorf. I have not done that precise calculation, 
Senator, but you are most definitely right that discretionary 
spending is, and as Congressman Hensarling also noted, a 
shrinking share of Federal outlays over time. And entitlement 
programs, mandatory spending is a growing share of Federal 
outlays, in some cases growing rather rapidly.
    And without addressing that path of spending, it would be 
extremely difficult to put the budget on a sustainable path.
    Chairman Murray. Okay. Well, given the discretionary 
spending cuts that Congress has already made, can you talk 
about what the economic impact or effect of further efforts to 
cut discretionary spending, both in fiscal year 2012 budget 
process and in this committee's final product?
    Dr. Elmendorf. So, over time, cuts in discretionary 
spending reduce in general the services that the American 
public receives, services in protection against foreign 
enemies, services in the highways they can use or the national 
parks they can visit, or other sorts of programs.
    Those cutbacks have a variety of human costs. They can also 
have economic costs depending on the nature of the cutback. 
Even infrastructure spending, for example, where many analysts 
think that the country should probably spend more, some sorts 
of projects could have a very high economic return. Other 
projects could have a very low economic return. So the nature 
of the economic effects depends very much on the particular 
changes in policy.
    In addition, in the short term, given the large gap between 
our economy's potential to produce output and the level of 
goods and services being demanded and being produced, cutbacks 
in Government spending or we believe increases in taxes in the 
near term would reduce the level of economic activity and 
employment relative to what would otherwise happen. I view that 
as really a separate sort of effect from more of the medium-
term or longer-term effects, where the effects, as I said, vary 
a good deal depending on the nature of the program being cut.
    Chairman Murray. Okay. Well, all of us on this committee 
know that we need to address the large, long-term drivers of 
our unbalanced Federal budget. But I also really believe that 
we have to take steps to strengthen that economic recovery and 
address the jobs crisis that we are seeing today.
    Now according to CBO's rule of thumb regarding economic 
growth and its relationship to budget projections, CBO states, 
and I quote, ``Stronger economic growth improves the budget's 
bottom line. Weaker growth worsens it.''
    Now CBO's projections for economic growth are now weaker 
for 2011 and 2012 than CBO projected just earlier this year. 
Correct?
    Dr. Elmendorf. Yes, that is right. We have not written 
formal projections. But if we would do a forecast today, yes, 
it would be weaker than we wrote in August.
    Chairman Murray. Okay. Well, nearly all of the economists 
are telling us that growth continues to suffer from a 
significant weakness in demand, and many are warning against 
pursuing overly aggressive measures of austerity in the short 
term. And I wanted to ask you, do you agree that a lack of 
demand is one of the key factors holding back our economic 
recovery?
    Dr. Elmendorf. Yes. I think it is a widespread view among 
analysts that lack of demand for goods and services is the key 
factor holding back the recovery. The further question, of 
course, is the source of that lack of demand.
    Chairman Murray. Okay. So how does a reduction in 
Government spending generally affect demand on the economy and 
during an economic downturn?
    Dr. Elmendorf. Reduction in Government spending will 
generally reduce the demand for goods and services, either 
because the Government is buying less itself or because it is 
providing lower transfers to individuals to purchase goods 
themselves.
    Chairman Murray. Does tax increases or spending cuts have a 
larger impact in reducing that demand and the economic growth?
    Dr. Elmendorf. Depends on the specific tax increase or 
spending cut that you have in mind, Senator. Certain forms of 
Government spending, we think, have a large bang for the buck 
in terms of effects on demands. Others have lower effects. 
Certain kinds of tax increases would restrain demand by more 
than other kinds of tax increases. It depends on the nature of 
the spending or tax change, often on the recipient of the 
spending or the payer of the tax.
    Chairman Murray. Okay. Thank you very much. I appreciate 
it.
    Representative Hensarling?
    Dr. Elmendorf. Thank you, Senator.
    Co-Chair Hensarling. Thank you.
    And Dr. Elmendorf, again, on behalf of the entirety of this 
committee, I want to thank you and thank your staff. We know 
that you are sorting through a number of homework assignments, 
if you will, from various and sundry members here. And again, 
we want to thank you with the diligence and professionalism you 
bring to that task.
    Dr. Elmendorf. Thank you, Congressman.
    Co-Chair Hensarling. Again, when I look at the statutory 
duty, as opposed to the statutory goal for this committee, our 
duty is to, frankly, offer recommendations in statutory 
language to address both the short-term and long-term 
imbalance.
    With respect to the short-term imbalance, is it not true 
that the stimulus bill with interest amounts to over $1 
trillion of spending, which accounts for a large temporary 
growth in our discretionary budget?
    Dr. Elmendorf. Yes. Although, as you know, Congressman, 
only a part of the Recovery Act was about discretionary 
spending. There were also increases in mandatory spending and 
reductions in taxes. In total, we put it a little over $800 
billion, and including interest, I think you are right, about 
$1 trillion.
    And it did lead to a bulge in discretionary funding and 
then to an attenuated bulge in outlays because not all the 
money got spent right away.
    Co-Chair Hensarling. I don't know if you have at your 
fingertips numbers with respect to agency growth? I had quoted 
a few, and now that I look down, apparently the source is your 
office. So I hope I am quoting your office correctly.
    Dr. Elmendorf. I don't have those at hand, Congressman. But 
if they are numbers from us, then you can certainly trust them. 
[Laughter.]
    Co-Chair Hensarling. So I can trust them. Well, then I 
trust that when you add in the stimulus, the Commerce 
Department has grown 219 percent from '08 to '10. That with the 
stimulus, EPA has grown 130.8 percent. The Energy Department 
has grown 170.7 percent with the stimulus. Education has grown 
180.6 percent, at a time when the economy has actually seen 
negative economic growth, and family paychecks have shrunk.
    And unfortunately, again, this is not the forum in which to 
debate the stimulus, but I think it has to be noted when we are 
talking about areas of the budget where savings could be had, 
at least the American people certainly deserve the facts.
    I want to follow up on, to some extent, a point that my co-
chairman was making, and I believe I have this right. Correct 
me if I am wrong. Under your alternative fiscal scenario, which 
essentially is a current policy baseline, I believe it is at 
2024 that all Federal revenues will simply be used to fund the 
mandatory portion of the budget, which is essentially our 
entitlement and interest. Is that correct?
    Dr. Elmendorf. I am sorry. Again, Congressman, you have a 
better hand around our facts than I have. But the qualitative 
point you are making is certainly right that mandatory spending 
just dominates the Government budget in an increasing way, in a 
rapidly increasing way over time.
    Co-Chair Hensarling. This actually came up in our earlier 
hearing with you, and I think I have this correct. Under your 
alternative fiscal scenario, you assume a growing revenue base, 
do you not? Do you not assume revenues increasing to their 
historic level of roughly 18, 18.5 percent of GDP?
    Dr. Elmendorf. Yes, that is right.
    Co-Chair Hensarling. And don't you also assume, in your 
alternative fiscal scenario, the tax increases that are 
contained within the Patient Protection and Affordable Care 
Act? Do you recall if those are assumed in your fiscal----
    Dr. Elmendorf. So what we do, as you know, in our extended 
baseline scenario, we try to follow current law. The 
alternative fiscal scenario is meant to track more closely what 
many people think of as current policy.
    What we do for revenues in that scenario is simply to hold 
them at the historical average share beyond 2021 without trying 
to specify ourselves what combination of specific tax policies 
the Congress might enact to hold revenues at that level. So 
there is no specific answer to whether any given tax is in or 
out of that alternative scenario beyond 2021. We have just set 
revenue at the historical average to provide information for 
the Congress of what might happen if that sort of policy or set 
of policies were continued.
    Co-Chair Hensarling. I have a question about the overseas 
contingency operation, the OCO funding. I believe that you have 
recently readjusted your baseline, but we all know that the 
President announced that our military engagement in Iraq will 
end this year. And the President plans to completely reverse 
the surge in Afghanistan, I believe, by this time next year.
    But I still think you are showing a pretty hefty sum in the 
overseas contingency operation line item. So can you explain to 
us the assumptions underlying this OCO number?
    Dr. Elmendorf. Yes, Congressman. What CBO does for any part 
of discretionary spending that is not capped under law is to 
take the latest funding that has been provided by the Congress 
and to extrapolate that over the decade to grow with inflation.
    So when we estimated the effects of the caps under the 
Budget Control Act at the end of July and in early August, we 
compared those caps not with the latest baseline projections we 
published in March, but with the later level of funding that 
the Congress had enacted at the end of March as part of the 
deal to get through the rest of the fiscal year.
    So, similarly now, although our latest baseline projection 
was published in August, we would focus in estimating any caps 
that one might impose on overseas contingency operations on the 
difference between those caps and the level that is the latest 
level that has been appropriated by the Congress. And that 
latest level is about $119 billion on an annual basis.
    If one extrapolates that $119 billion with growth for 
inflation, one ends up with about $1.3 trillion over the coming 
decade. And for that, as for other complements of discretionary 
spending, we don't make an evaluation about how those numbers 
compare with the likely demand for funds or with any particular 
evaluation of the appropriateness of the spending. It is a 
mechanical extrapolation.
    If you thought we would spend less than that over time, 
then one could----
    Co-Chair Hensarling. If I could, Dr. Elmendorf, I see I am 
already over my time. But I guess it is fair to say that under 
your protocols and your rules, the President's recent 
announcement that this money is essentially not going to be 
spent anyway does not come into your calculation?
    Dr. Elmendorf. Not until the Congress enacted a different 
level of appropriations, Congressman.
    Co-Chair Hensarling. Thank you. Thank you.
    Chairman Murray. Thank you very much. Can I just ask how 
closely has that extrapolation tracked over the last 5 years?
    Dr. Elmendorf. Well, the written testimony shows the 
pattern of funding the Congress has provided. For the past 
several years, the annual funding was on the order of $160 
billion. So this new level is about $40 billion below the level 
that has prevailed in fiscal years 2009, 2010, and 2011.
    Chairman Murray. Okay. Thank you.
    We will now move to each of our committee members for 6 
minutes, and we will begin with Representative Becerra.
    Representative Becerra. Dr. Elmendorf, thank you very much 
for being here, and thank you for the work you are helping us 
do over these last several weeks and, hopefully, over the next 
few weeks as well.
    Let me just try to dispose of one question real quickly. 
One of our major problems is the drop in revenues we have seen 
over the last several years, and we are trying to tackle the 
issue of how to best increase those revenues.
    One of the ways you do that is through economic growth. If 
folks are back at work, unemployment rates go down. That means 
you are paying less in unemployment benefits, which is an 
outflow of money, and you are also increasing your revenues 
because people are paying taxes again.
    My understanding is that if you increase the level of 
employment by a certain amount, you will see a commensurate 
decrease in the level of deficits and, of course, a 
commensurate increase in the GDP. Can you give us a real quick 
synopsis of what happens if we put people back to work?
    Dr. Elmendorf. So the stronger the economy is, as you say, 
Congressman, the more the Federal Government and other 
governments collect in revenue and the less it pays out in 
benefits of certain sorts. The biggest response is on the 
revenue side.
    If one is looking for a rule of thumb, people often say 
that the Federal Government's effective tax rate on the margin 
for an extra dollar earned is to collect about 25 cents of that 
in Federal revenue. So an extra dollar of GDP might induce 
another 25 cents or so of extra revenue. That is, of course, a 
very, very rough rule of thumb, and the actual number would 
depend very much on the way in which the economy improved and 
who received the income and how it was taxed and so on.
    Representative Becerra. So the more you put those 15 
million Americans back to work, each of them earning even if it 
is only an average American salary, that is thousands of 
dollars per worker. That effect of a quarter of that dollar 
that each one of those workers earns could be revenue to the 
Government, which would help us decrease these deficits?
    Dr. Elmendorf. That is right, Congressman. It depends, of 
course, on what policies one invokes to move the economy back 
closer toward full employment.
    Representative Becerra. And that is where we invite you 
part of this 12-person panel to help us with those answers.
    Let me move on to another question with regard to 
discretionary spending. My understanding is that your 
projections, and you showed us through some of these charts, 
are what you think might happen if the reductions in some of 
these outlays and in the investments would occur both in 
defense and nondefense over the next 10 years as a result of 
the caps and then, if we are not able to come to some 
agreement, as a result of the triggers in sequestration.
    My understanding is under the caps, there are firewalls 
which separate the savings that we would extract from defense 
from nondefense, but that those firewalls exist for only 2 
years. Your projections go out for 10 years. So are you saying 
that the savings that you show in defense are guaranteed, or 
that is what we presume if the projections continue forward, 
that half of the savings will come from defense and half of the 
savings in the caps will come from nondefense?
    Dr. Elmendorf. So what the Budget Control Act does is to 
establish separate caps on security and non-security funding 
for fiscal years 2012 and 2013, and security funding is both 
defense funding and some other pieces of funding as well. But 
you are right. Beyond those first 2 years, there is no cap on 
overall funding.
    What we looked at in the written testimony was three 
alternatives--one in which the reduction from the inflated 
former baseline with inflated amounts, one in which that was 
taken up almost entirely through cuts in defense spending; one 
in which it was absorbed almost entirely through cuts in 
nondefense funding; and one where it was met through a 
combination, proportional cuts in defense and nondefense 
funding. I presented the middle of those here for simplicity. 
But we looked at the range because, in fact, it will be up to 
future Congresses to decide.
    Representative Becerra. And that is the point I was hoping 
you would make is that it really depends on what Congress does 
where we will see the savings occur?
    Dr. Elmendorf. Yes. Absolutely.
    Representative Becerra. Another quick question. Total up 
all discretionary spending, whether it is for Pentagon, whether 
it is for education, environmental protection, clean water, 
clean air, food safety inspection, total that up. How does it 
compare to the amount that we spend through the tax code 
through what are known as tax expenditures, the tax earmarks?
    Dr. Elmendorf. We haven't published an estimate of that, 
Congressman. I have seen estimates that the sum of tax 
expenditures is about $1 trillion a year. As I mentioned, the 
total funding for discretionary purposes last year is about 
$1.3 trillion.
    Representative Becerra. So we spend almost as much through 
the tax code for certain constituencies as we spend through the 
entire appropriations and allocations process through the 
regular budgetary process. That is the type of spending that we 
are not talking about today, the tax expenditures. But you did 
discuss it some the last time you were here.
    Dr. Elmendorf. Yes. Yes.
    Representative Becerra. Appreciate that very much.
    Final question. I want to thank you for the report you just 
issued on the distribution of income in America and comparison 
over the years. You, I think, highlighted some pretty startling 
numbers about the disparity in income and wealth in America 
today where the top 10 percent, 20 percent of Americans, and 
actually, the top 1 percent of Americans, have really seen a 
concentration of wealth go in their direction, as opposed to 
essentially the very middle of America.
    Can you give us a quick synopsis of what you found?
    Dr. Elmendorf. So we have found, as other researchers have 
found, Congressman, very pronounced widening of the income 
distribution in this country, with reductions in the share of 
national income going to the bottom four quintiles over the 
1979 to 2007 period. And a very large increase, roughly a 
doubling, in the share of national income going to the top 1 
percent of the population.
    Representative Becerra. Thank you. And I see that my time 
is about to expire. So I thank you very much for all your 
assistance.
    Dr. Elmendorf. Thank you, Congressman.
    Representative Becerra. Yield back.
    Chairman Murray. Thank you.
    Senator Kyl?
    Senator Kyl. Thank you, Dr. Elmendorf.
    Let me read to you an email that was sent to interested 
Hill staff by the Associate Director for Legislative Affairs at 
the Congressional Budget Office on October 17th. The subject of 
the email is ``HHS CLASS Announcement on CBO's Baseline.''
    ``On Friday, the Secretary of HHS announced that the 
department does not plan to implement the CLASS Act long-term 
care insurance program under current law. Therefore, in its 
next baseline budget projections, which will be issued in 
January, CBO will assume that the program will not be 
implemented unless there are changes in law or other actions by 
the administration that would supersede Friday's announcement.
    ``Furthermore, following longstanding procedures, CBO takes 
new administrative actions into account when analyzing 
legislation being considered by the Congress, even if it has 
not published new baseline projections. Beginning immediately, 
therefore, legislation to repeal the CLASS provisions in 
current law would be estimated as having no budgetary impact.''
    Now this says that your longstanding policy is to take new 
administrative actions into account. And as you testified in 
response to Representative Hensarling's question, this would 
suggest that you wouldn't necessarily wait for Congress to act.
    The President is commander-in-chief. His troop announcement 
that Representative Hensarling talked about is tantamount, in 
effect, to a Congressional action. He has the ability to 
withdraw the troops down.
    What is the difference between his announcement that we 
will have no presence in Iraq after Christmas and his previous 
decision and announcement that we would withdraw in stages the 
troops from Afghanistan over the ensuing year, what is the 
difference between that announcement and the CLASS Act 
announcement in terms of CBO baseline decisions?
    Dr. Elmendorf. I think the difference, Senator, is a 
difference between the treatment of mandatory spending and 
discretionary spending, laid out at least by 1985 in the 
Balanced Budget and Emergency Deficit Control Act and followed 
since then by CBO in conjunction with the Budget Committees.
    For mandatory spending, and the CLASS Act falls in this 
category, a program where Congress has established certain 
rules, parameters within which administrative actions can be 
taken, we are always trying to provide our latest estimate of 
the effects of that set of authorizations on the Federal 
budget. And if there is news in the form of a very distinct 
announcement that some program has been abandoned, then we 
adjust the scoring base for those mandatory programs.
    But for discretionary spending, our projections don't 
respond to particular sets of programs or objectives because 
the Congress can choose every year how much to provide for 
certain purposes. So----
    Senator Kyl. But if I could interrupt, this is a 
distinction without a difference. The President is the 
commander-in-chief. He is the person that deploys troops, not 
Congress. So are you saying that that difference requires you 
to wait until Congress acts, even though the commander-in-chief 
has already made his announcement and begun the program for 
withdrawal?
    Dr. Elmendorf. Yes, Senator----
    Senator Kyl. They have--in theater, they are making plans 
as we speak on how they are going to withdraw the troops from 
Iraq.
    Dr. Elmendorf. But, Senator, with respect, I think it is a 
distinction with a difference. We are not equipped to project 
what defense funding the President will request in the future 
or what funding the Congress will enact in the future.
    Senator Kyl. So are you----
    Dr. Elmendorf. This news from the administration is a 
factor that will presumably affect the funding they request and 
the funding Congress enacts, but not necessarily in a one-to-
one way that we could analyze.
    Senator Kyl. So this memorandum that was sent should have 
distinguished between mandatory and discretionary spending when 
it talks about CBO's policy. ``CBO will assume the program will 
not be implemented unless there are changes in law by the 
administration that would supersede the announcement. Following 
longstanding procedures, it takes new administrative actions 
into account.''
    So they should have distinguished between mandatory and 
discretionary. Is that what you are saying?
    Dr. Elmendorf. I think you are right, Senator. I should 
have put that word in. But just to emphasize, the things I am 
describing on both the discretionary and mandatory side are 
procedures that go back at least a quarter century.
    Senator Kyl. So then with regard to the so-called OCO 
savings that the President included in his alleged budgetary 
savings, it all depends upon whether the defense appropriations 
legislation is passed or when that legislation is passed as to 
whether you would change your baseline? Is that correct?
    Dr. Elmendorf. Yes. So Congress enacts a different level of 
appropriations at any point, then anything we would do after 
that point would respond to that new level of enacted 
appropriations.
    Senator Kyl. Thank you.
    So if we are able to get the appropriations bills completed 
before the December 23rd deadline for this committee to act, 
much of the alleged OCO savings would no longer be available 
because of an adjustment in your baseline projections. Would 
that be correct?
    Dr. Elmendorf. Well, I don't know, Senator. It depends what 
level appropriations you enacted.
    Senator Kyl. To the extent they are lower than the previous 
year's, would it not cut that amount from your baseline?
    Dr. Elmendorf. To the extent that they are lower than the 
$119 billion that has already been enacted for this fiscal 
year----
    Senator Kyl. Correct.
    Dr. Elmendorf [continuing]. That is a good deal lower than 
the $159 billion from the last fiscal year. If, in fact, the 
Congress decided to enact appropriations for the rest of this 
fiscal year that were below $119 billion for overseas 
contingency operations, then that would bring down our 
projection of those and the base against which we would 
estimate further reductions, importantly.
    Senator Kyl. Thank you very much.
    Dr. Elmendorf. Thank you.
    Chairman Murray. Senator Baucus?
    Senator Baucus. Thank you, Madam Co-Chair.
    I would like to just focus a little bit on defense 
spending. Is it true that our current level of defense 
spending, including OCO--otherwise known as overseas 
contingency operation, otherwise known as war funding--is 
higher now in historic terms compared with any other time in 
American history except for World War II?
    That is, is the current level of defense spending, 
including war funding, greater now than during the Korean War?
    Dr. Elmendorf. Yes, I believe that is true, Senator.
    Senator Baucus. Okay.
    Dr. Elmendorf. As I showed in my testimony, as a share of 
GDP, that spending is----
    Senator Baucus. No, I am not talking about--no, no. I am 
not talking about share of GDP.
    Dr. Elmendorf. In dollars----
    Senator Baucus. Dollars.
    Dr. Elmendorf. Dollars adjusted for inflation?
    Senator Baucus. Dollars. Dollars. Dollars adjusted for 
inflation.
    Dr. Elmendorf. Yes. So, in dollars adjusted for inflation, 
DoD spending was about $240 billion during the Korean War, and 
in 2011, it is nearly $700 billion.
    Senator Baucus. Okay. So the same would be true for the 
Vietnam War? That is, we are spending more dollars----
    Dr. Elmendorf. Yes.
    Senator Baucus [continuing]. Than we did in Vietnam, 
adjusted for inflation?
    Dr. Elmendorf. Yes, Senator.
    Senator Baucus. Adjusted for inflation. Thank you.
    And more than we ever did during the Reagan administration, 
adjusted for inflation?
    Dr. Elmendorf. Yes, Senator.
    Senator Baucus. And more than the Cold War average?
    Dr. Elmendorf. Yes, Senator.
    Senator Baucus. Which is the highest since World War II. Is 
that correct?
    Dr. Elmendorf. So by our--I think during the Reagan 
administration, yes, that was higher than in the Vietnam War or 
Korean War.
    Senator Baucus. Okay. We have already touched on this, but 
I just want to nail this down. The Budget Control Act, as you 
mentioned, had two separate caps--for what is it, 2012----
    Dr. Elmendorf. 2012 and 2013.
    Senator Baucus [continuing]. And 2013, but no separate caps 
for security and non-security thereafter?
    Dr. Elmendorf. Yes, Senator.
    Senator Baucus. Which means that the Appropriations 
Committees of the Congress could decide to spend more on 
security than is allowed under the caps in the first 2 years?
    Dr. Elmendorf. Yes. It can pick any allocation under those 
total caps that it chooses.
    Senator Baucus. Anything they want to do under those total 
caps?
    Dr. Elmendorf. Yes. Now if this committee doesn't achieve 
any additional savings, then the enforcement procedures 
establish separate caps for defense and nondefense 
discretionary spending.
    Senator Baucus. Okay.
    Dr. Elmendorf. But under the basic caps, you are right, 
Senator.
    Senator Baucus. Okay. So there are basic caps. There are 
base caps in the act. Are there any caps on war spending?
    Dr. Elmendorf. No, Senator. The caps do not constrain war 
spending.
    Senator Baucus. There are no caps on war spending?
    Dr. Elmendorf. No. I think, technically, the caps would be 
adjusted upward by any amount of spending that was designated 
by the Congress for overseas contingency operation.
    Senator Baucus. That is a technical point. The main point 
is there are specific caps for security and non-security at 
least for 2 years, then no caps in the act for subsequent 
years, and no caps whatsoever on OCO.
    Dr. Elmendorf. That is correct, Senator.
    Senator Baucus. Nothing.
    Dr. Elmendorf. Yes.
    Senator Baucus. Okay. No caps on OCO.
    Now has the Appropriations Committee sometimes gone to OCO 
to spend dollars that are really arguably not war funding 
because that is a kind of an extra pot of money to use? It is 
there, and there are no caps on it. Has that ever happened?
    Dr. Elmendorf. Senator, I can't speak to the motivations or 
thought process of the Appropriations Committee. Certainly, 
there will be inevitably some ambiguity in any effort to 
allocate costs, and what costs are truly attributable to these 
wars and what costs are not will be a matter of judgment. And--
--
    Senator Baucus. Okay. Didn't the Senate Appropriations 
Committee propose--maybe they actually did--to move $9.9 
billion of base programs requested by the President to this 
account?
    Dr. Elmendorf. I think over the past few years, Senator, 
there have been some movement of money that used to be 
designated as OCO into base budgets, and I think some movement 
in the other direction as well. I am afraid I don't have an 
overall assessment of the numbers involved.
    Senator Baucus. What about there are reports that--and this 
obviously double-checked--$100 million was taken out of OCO for 
migration and refugee assistance for places like Kenya and 
Pakistan?
    Dr. Elmendorf. I am sorry, Senator. I don't know.
    Senator Baucus. But we do know that there is no limit on 
the OCO account. And let me ask, how is it defined? What are 
the definitions of what constitutes and does not constitute 
appropriate spending out of the war account?
    Dr. Elmendorf. So, in our presentations, we follow the 
labeling provided by the Congress, and it is up to you and your 
colleagues to decide what you support under various categories.
    Senator Baucus. But it just kind of sounds like it is what 
Congress wants to do.
    Dr. Elmendorf. That is our--yes, Senator.
    Senator Baucus. And that sometimes happens around here. But 
you are saying there are no scoring rules under the Budget 
Control Act that would restrict the migration of base defense 
spending to OCO in the future?
    Dr. Elmendorf. I think that it is up to the Congress, as I 
said, to designate what it views as related to those operations 
and what it views as part of spending that would happen anyway.
    Senator Baucus. And if this committee were to say dollars 
could not be spent on a certain program, my understanding is 
that that would not be scored by your office?
    Dr. Elmendorf. Again, a certain discretionary program--
Senator Kyl has taught me to be very careful about that. 
Changes to mandatory programs, of course, we would do estimates 
of. But changes in individual discretionary programs, we would 
not take account of because we are relying on the overall level 
of the caps.
    Senator Baucus. Correct. Correct.
    Dr. Elmendorf. And the squeezing of one particular program 
without a change in the cap level----
    Senator Baucus. Right.
    Dr. Elmendorf [continuing]. We think would be filled by 
other----
    Senator Baucus. What if this committee were to establish 
caps? Would that be scored? What if there were a cap on OCO?
    Dr. Elmendorf. If the committee established caps on OCO 
that were below the level of funding that is based on the 
extrapolation with increases for inflation from the latest 
enacted appropriations, then we would estimate savings from 
that.
    Senator Baucus. And you are suggesting about one-point--
what did you say?
    Dr. Elmendorf. About $1.3 trillion.
    Senator Baucus. About $1.3 trillion.
    Dr. Elmendorf. Yes.
    Senator Baucus. Uncapped?
    Dr. Elmendorf. Yes. And that is just the--it is not magic. 
That is the $119 billion, the most recently enacted, 
extrapolated with inflation.
    Senator Baucus. Extrapolated forward with no caps?
    Dr. Elmendorf. Yes.
    Senator Baucus. Okay. But if we were to set a cap, then 
that would be scored?
    Dr. Elmendorf. We would estimate the effects. Yes, Senator.
    Senator Baucus. Thank you.
    Chairman Murray. Thank you, Senator Baucus.
    Representative Upton?
    Representative Upton. Thank you, Madam Chair.
    And again, Dr. Elmendorf, we appreciate your participating 
today. And I just want to take us back to a question from 
earlier days, and that is, as this committee works to try and 
get an agreement, a solution, what is the real date that you 
want us to give you the information that your worker bees can 
turn out a reasonable number for us?
    Dr. Elmendorf. So, as you know, Congressman, our legions of 
skilled analysts are working very hard for this committee 
already.
    Representative Upton. Have they had time off until now?
    Dr. Elmendorf. No, Congressman, I am afraid not. We have a 
terrifically hard-working group, as you know.
    As I said the last time I was here, if you have a set of 
proposals that would make changes across a range of mandatory 
spending programs, then that would require us some weeks to 
work with legislative counsel and the staff of this committee 
in refining the legislative language to accomplish the 
objectives that you are setting out to accomplish and then for 
us to produce a cost estimate.
    And backing up from Thanksgiving, that left us looking at 
the beginning of November, which we are very aware, as you are, 
Congressman, is not very far away.
    Representative Upton. Thank you.
    What is the deficit as a share of GDP today?
    Dr. Elmendorf. The deficit in fiscal year 2011 just 
completed was about 8.5 percent of GDP.
    Representative Upton. And if this committee fails and we 
end up with a sequester, and we do the numbers that you 
suggested here in your testimony for both defense and 
nondefense. So that defense we would end up with a sequester 
of, in essence, of $882 billion in savings over the 10 years 
and a number of almost the same, $794 billion, in nondefense 
over that same 10 years, and nothing on the entitlement side or 
nothing on the mandatory side--just those two--where would we 
go in terms of the debt as a percentage of GDP 10 years down 
the road?
    Dr. Elmendorf. So, Congressman, let me be clear. These 
numbers at the bottom of these tables are a comparison of the 
sequestered cap path to the inflated----
    Representative Upton. Right. Right.
    Dr. Elmendorf [continuing]. Extrapolation. It is not the 
amount of the sequester or the enforced budget portion itself. 
Remind you, our baseline projections for August incorporated 
the $1.2 trillion that is under current law to be achieved 
either through the actions of this committee or through these 
enforcement procedures.
    So whether the committee hits $1.2 trillion or hits the 
last--the remainder is filled in to the enforcement, as long as 
you don't save more than $1.2 trillion, you are putting 
yourself back to our baseline projection from the summer. Under 
that projection, allowing for the expiring provisions of the 
tax code to expire and Medicare payments to doctors to be cut 
very sharply and the other features of current law, deficits, 
by the end of the decade, are 1.5 percent or so of GDP, and 
debt is actually declining relative to GDP.
    But that hinges absolutely critically on revenues rising 
above their historical average share of GDP, as it would under 
current law, and discretionary spending falling well below its 
average share of GDP in order, essentially, to make room for 
the great increase in Social Security and the major healthcare 
programs.
    Representative Upton. I didn't know if you saw the GAO 
report that was released earlier this week as related to if 
this committee fails that--or I want to say that $1 trillion in 
savings is not sufficient, is the words that they used, for 
stability, and they predicted, in essence, I believe, a credit 
downgrade. Have you had a chance to look at that report?
    Dr. Elmendorf. I have glanced at it, Congressman.
    Representative Upton. Do you have any comments? I know it 
just came out this week.
    Dr. Elmendorf. One technical point, which is that they 
offer two scenarios. One of which is close to our alternative 
scenario based on current policy. The other of which they view 
as closer to current law.
    Nonetheless, what they do in that scenario is to limit the 
increase in tax revenue as a share of GDP that would actually 
happen under current law. Our extended baseline scenario 
incorporates the rising revenues relative to the GDP that would 
persist and go on beyond this next decade.
    So both of their scenarios look worse than our better 
scenario. It is just a difference in policy assumption about 
tax revenue--tax policy. But we certainly agree very much with 
the underlying point of the analysis that under current 
policies, the U.S. Government is on an unsustainable fiscal 
path and that the magnitude of changes that will be needed from 
current policies is very large.
    As I said the last time I testified here, if one wanted to 
consider extending the expiring tax provisions and limiting the 
reach of the alternative minimum tax and adjusting Medicare's 
payments to doctors, the deficit over the coming decade becomes 
$8.5 trillion rather than the $3.5 trillion under current law. 
And debt would be rising relative to GDP to levels that we have 
almost never seen in this country.
    Representative Upton. Thank you.
    Chairman Murray. Representative Clyburn?
    Representative Clyburn. Thank you very much, Madam Chair.
    And Dr. Elmendorf, thank you very much for being here again 
today.
    You may recall that at the first hearing I discussed a 
little bit of the growing wealth gap that exists. I did that 
with some references to unemployment numbers.
    Now your recent report indicates that over the last 28 
years--in my estimation, that is a generation. Over the last 
generation, we have seen an increase in income of upper 1 
percent households in America of 275 percent. During that same 
time, we have seen an increase in the top 20 percent of 65 
percent. But of the bottom 20 percent, only 18 percent.
    Now over that same period of time, for the 60 percent of 
the middle, we have seen income has grown only 40 percent. That 
indicates to me that the middle income is shrinking relative to 
the rest of the country.
    Now if we were to extrapolate that out, as you talked 
about, I would assume that we are where we are because of--
well, let me put it this way. To the extent that Government 
policy has allowed this gap to exist, if we continue current 
policy, then it is fair to say that we are going to experience 
that kind of continued widening of the wealth gap in America, 
in the United States.
    Dr. Elmendorf. So, Congressman, one of the issues that we 
wrestle with in our projections is the evolution of the income 
distribution. The study that we did, as you know, ends with 
data from 2007.
    Representative Clyburn. Right.
    Dr. Elmendorf. What has happened during the past few years 
of the recession and financial crisis is not clear. Although if 
you look in our study, some past recessions have shown some 
narrowing of the income gap, particularly because higher income 
people collect a relatively larger share of their income from 
capital income, which tends to be more cyclical.
    So just where things precisely stand today, I am not sure. 
Our projections do incorporate some ongoing widening of the 
income distribution, but whether is it is on the--whether the 
events of the last 30 or so years will continue at that pace, 
we don't know, and I don't think our projection calls for a 
continued widening to that extent.
    But neither do we see forces at hand that would cause that 
to be reversed in coming years.
    Representative Clyburn. So we don't see anything that could 
possibly shrink that either?
    Dr. Elmendorf. No, again, except for the effects of this 
recession, which we don't have data for. But looking from here 
on, we don't see those underlying factors reversing.
    Representative Clyburn. I would assume then that this--I 
have seen a whole lot in the media in recent days about who is, 
in fact, paying the taxes in the country. I am assuming, as my 
dad used to tell me, ``Don't argue about taxes, son, because if 
you really owe them, that means you made something.''
    So I am assuming that these people are not paying because 
they don't owe anything. They don't owe anything because they 
have not made anything. So that is just an assumption on my 
part.
    But let me look at this economic ladder that we talk about 
a lot. If we are going to see a shrinkage in that gap, it would 
seem to me that we need to start looking at how do you prepare 
people to assume tax-paying responsibilities in our society? 
And we do that by investing in their education, to the extent 
that things like Pell grant, Head Start, Title I for 
disadvantaged people, all of these things are designed to 
prepare people to earn income and, therefore, pay taxes and not 
be on the Government dole, as we like to say down South.
    Am I to believe that if we dramatically reduce that 
investment, then we will dramatically reduce people's abilities 
to assume these responsibilities and to become taxpayers?
    Dr. Elmendorf. You are raising important, but difficult 
questions, Congressman. People's ability to earn income comes, 
as you know, from a whole variety of forces on their lives. 
Federal Government policy is one of those forces. And if 
Federal policy were changed in a way that provided 
significantly less support for people in obtaining educations 
or getting skills, that could well affect their income in the 
future.
    But I don't have a way of quantifying that. It depends very 
much on the specific programs. There is very large research 
literature and a lot of experimentation in the world about 
training programs, for example. And some seem to work well, and 
some seem to work badly. And the ones that work well are 
difficult sometimes to expand to a larger scale.
    So just what role particular Government programs play, 
again, is a much-studied question, and we do some work in that 
area. But there isn't a very good general answer to how 
important that is as a factor relative to other factors 
influencing people's ability to earn income, as you say, and 
then, through that, to pay taxes.
    Representative Clyburn. Well, thank you very much, Dr. 
Elmendorf. This time goes real fast here.
    Dr. Elmendorf. Thank you, Congressman.
    Representative Clyburn. My time has expired.
    Chairman Murray. Senator Portman?
    Senator Portman. Thank you, Co-Chair.
    And thank you, Director Elmendorf, for being with us again 
and for all the hard work that you and your team are doing in 
responding to our many inquiries. Because I said that, I expect 
mine to be prioritized. Kidding, guys. [Laughter.]
    Dr. Elmendorf. We prioritize everybody first, Senator.
    Senator Portman. Thank you, yes. Especially the committee, 
I hope, because we do have a short period of time here, and we 
have a lot of work yet to do.
    You talked a little about jobs and the economy earlier, and 
my colleague Congressman Clyburn just raised this issue, the 
importance of jobs, which is, after all, one way you get people 
paying taxes is to be sure they have the opportunity to earn 
enough money to pay those taxes. And you had said that you 
believe that demand was the key issue, and the source of that 
lack of demand was the tough question.
    And I would just ask you if you could comment on the 
unsustainable fiscal path that you have outlined repeatedly, 
including again today, and the fact that, as you said, we are 
increasing the debt by anywhere from $3.5 trillion to $9 
trillion over the coming decade, depending on whether you use 
the current law or current policy baseline. Reminding us that 
our commitment here is to reach $1.5 trillion and $1.2 trillion 
to avoid sequester. That, of course, isn't even close to the 
increase we are likely to see from the current $14.5 trillion 
debt.
    What impact does that have? I am sure you have looked at 
the Rogoff and Reinhart study and others who have commented on 
the impact of this unsustainable fiscal situation on our 
current economy.
    Dr. Elmendorf. So I think the unsustainable path matters in 
the short run in various ways. Partly, the borrowing the 
Government has done and anticipation of Government borrowing 
can crowd out private investment to some extent. At the moment, 
with private investment weak anyway, the magnitude of that 
crowding out is less clear. In fact, we see Treasury interest 
rates, as you know, being very low at the moment.
    But there can be crowding out of investment. I think beyond 
that, the uncertainty about fiscal policy is probably weighing 
on households and businesses. They can recognize that there 
will have to be, as a matter of arithmetic, changes in taxes 
and/or spending relative to current policy, but they don't know 
what those changes will be. And I think that sort of 
uncertainty is naturally an inhibiting factor in decisions, 
particularly commitments of money over time to invest in 
factories and equipment, to invest by hiring people, for 
households to invest in housing and durable goods.
    That uncertainty is a piece, I think, of broader 
uncertainty about Government policies. There are a lot of 
different policies that are, I think, up in the air in a way. 
And that policy uncertainty, of course, is a piece of a much 
broader uncertainty about the state of the economy and the 
income that households think they will have in the future and 
the demand for the goods and services that businesses think 
they will have in the future.
    Senator Portman. Well, I appreciate that. And as an 
economist, I appreciate your giving us really a sense of the 
importance of our task because it is not just about cutting 
spending, is it? It is about the economy and jobs. And although 
we are not called the jobs committee, what we do will affect 
that sense of certainty and predictability going forward.
    Dr. Elmendorf. Yes.
    Senator Portman. And again, not in the substantial ways 
that we would hope, all of us, but it will make a difference 
and take us in the right direction. The alternative, of course, 
has been talked about today as well, which is if we don't do 
our work, what impact that could have, even make our prospects 
for economic growth more negative.
    Let me use some figures here that you may not trust because 
they are from the Office of Management and Budget. And you said 
earlier that you trusted the CBO figures, but I think they are 
consistent with yours. And let me start by saying I totally 
agree with what you said earlier. Mandatory spending dominates 
the Federal--or mandatory spending dominates the Federal 
spending. That was your quote a few minutes ago.
    Co-Chairs Murray and Hensarling have also made that same 
point in various ways from a little different perspective, and 
I totally agree with that. I think if this committee doesn't 
get at the issue, which is the biggest part of our budget, over 
50 percent of the budget--60 percent, if you include interest 
on the debt--and the fastest-growing part of our budget has 
gone from roughly 25 percent of our budget in the 1960s to over 
50 percent today.
    If we don't get at that, the largest part and the fastest-
growing part of the budget, we will, of course, not have 
accomplished our goal. But having said that, let me give you 
some statistics on the discretionary side, since that is the 
topic of our hearing today. I will give you some numbers from 
1990 until today.
    Nondefense discretionary has risen during that time by 95 
percent, which, by the way, is nearly double the 52 percent 
growth in defense spending. So if you took 52 percent growth in 
defense spending from 1990 until today, 95 percent on 
nondefense. Now admittedly, the defense spending is not as high 
because the increases we have seen have been more recent, from 
2001, which reflected an increase from the cuts in the 1990s on 
defense. So if you use just the last decade, defense would be 
higher.
    But let us look then at 2001 to 2011 on the nondefense 
side. Outlays on the education side, discretionary spending up 
116 percent in the last 10 years. International spending up 102 
percent. Veterans spending up 100 percent. Community and 
regional development spending up 71 percent. Health research 
and regulation spending up 56 percent, and so on.
    So I just think we need to keep both of these things in 
mind. One, that if we don't deal with the spending issues, it 
is tough to get this economy going. And second, we have seen 
some substantial increases in the discretionary spending, 
understanding that the BCA has now put those spending levels 
under more constraints. Do you agree with those numbers?
    Dr. Elmendorf. I don't know those--have this back of the 
hand, Senator. But I would not argue with your numbers.
    Senator Portman. Well, again, thank you for all your help 
to help us achieve the goal we have all talked about today, and 
we look forward to working with you going forward.
    Dr. Elmendorf. Thank you, Senator.
    Chairman Murray. Senator Kerry?
    Senator Kerry. Dr. Elmendorf, thank you very much for being 
here. Thank you for the terrific work you and your team are 
doing. We appreciate it.
    It is my understanding that CBO keeps regular estimates on 
the number of jobs that have been created by the American 
Recovery and Reinvestment Act. Is that correct?
    Dr. Elmendorf. Yes, Senator. We are required to publish 
estimates once a quarter.
    Senator Kerry. Right. And so, just quickly, because I don't 
want to spend much on time, is it not correct that without the 
policies of the American Recovery and Reinvestment Act that GDP 
would be lower and unemployment would be higher?
    Dr. Elmendorf. Yes, Senator.
    Senator Kerry. So it has had a positive impact on GDP and 
on reducing unemployment?
    Dr. Elmendorf. Those are our estimates, Senator. Yes.
    Senator Kerry. Now, with respect to our work here in the 
committee, I talked to you last time you were here about 
``going big,'' about a $4 trillion total target if you include 
the money already cut, $3 trillion if you don't. It is my 
understanding that you already have in your baseline an 
accounting for $1.2 trillion in deficit reduction by this 
committee. Is that accurate?
    Dr. Elmendorf. Yes.
    Senator Kerry. So if all we do in this committee is $1.2 
trillion, we, in effect, are not reducing the deficit below the 
current levels or rates?
    Dr. Elmendorf. That is right. That is because of these 
automatic enforcement procedures. If you don't take explicit 
action, there is a backup plan, which is the further cuts in 
spending that I have outlined here.
    Senator Kerry. Now with respect to the bigger deal, so to 
speak, would you tell the committee or share with the committee 
your perception of assuming you had a $3 trillion reduction, 
which included something along the ratios we have all heard 
about either in Rivlin-Domenici or in Simpson-Bowles or Gang of 
Six, somewhere in the vicinity of 3-to-1 or 2-to-1 of cuts to 
revenue, and assuming that the revenue were to come exclusively 
from the highest-end people, that 275 percent increase in 
income, can you make a judgment as to what the impact would be 
on the marketplace and perceptions of deficit reduction or job 
growth that come from the $3 trillion versus just achieving the 
$1.2 trillion goal?
    Dr. Elmendorf. So just looking at the aggregate deficit 
reduction, I think it is clear that larger reductions coming 
from the work of this committee would have a positive effect on 
current spending and on current output and employment. And 
conversely, that a failure of this committee to reach agreement 
or for Congress to enact an agreement reached by the committee 
would have a negative effect on confidence and, thus, on 
spending.
    Senator Kerry. And if we do simply $1.2 trillion or $1.5 
trillion, which is the target goal, and that is all we do, 
isn't it a fact that we are going to be back here in about a 
year or 2 or 3, at maximum, dealing with the very same issues 
that are on the plate now about the unsustainability of our 
budget?
    Dr. Elmendorf. Yes, Senator. And I think that is certainly 
right.
    Senator Kerry. So in terms of the duty that Co-Chair 
Hensarling has talked about to provide language to 
significantly reduce, the most important message to the 
marketplace, I am told, comes if you achieve a $4 trillion 
total, which is the only way to begin to stabilize the debt. Is 
that not accurate?
    Dr. Elmendorf. Yes, the amount that is needed depends, very 
importantly, on how you view the expiring tax provisions and 
some other provisions of current law that would take us away 
from current policies to which people have become accustomed. 
If one extends all or a large share of the expiring tax 
provisions over the next few years, then the gap between 
spending and revenues over the coming decade becomes much 
larger, and much more other action is needed in order to 
achieve any given objective for the path of debt relative to 
the size of the----
    Senator Kerry. Well, can you share with the committee what 
would have a greater negative impact on growth--the failure of 
the committee to come up with more than $1.2 trillion or $1.5 
trillion and the marketplace signals that would send about the 
continued fiscal plight of the country, or an ability to come 
up with a $3 trillion or $4 trillion level that had that 3-to-
1, 2-to-1 ratio that I talked about with any revenue coming 
either from closing tax loopholes or exclusively from that 
high-end 275 percent increase income earner?
    Which would have the greater negative impact on our 
economy--finding some revenue from those folks and getting a 
deal, or having no deal and not having that revenue?
    Dr. Elmendorf. I am afraid, Senator, I can't analyze the 
sort of policy proposals you are describing in my head.
    Senator Kerry. Well, can you analyze----
    Dr. Elmendorf. And we have not done an analysis of any of 
the packages you have described.
    Senator Kerry. But you can analyze--I mean, you have told 
us that if we fail to come up with anything that deals with the 
unsustainability, we are sending a bad message to the 
marketplace, aren't we?
    Dr. Elmendorf. Yes. Again, I think in terms of the amount 
of deficit reduction, the more that this committee can achieve 
over some period of time, the better that would be for current 
confidence. But I can't weigh that off against the effects of 
sort of a hypothetical combination of specific spending and tax 
changes.
    Senator Kerry. Well, leave the hypothetical out. Can you 
tell us what, for instance, the expiration of the top end of 
the Bush tax cut, if it went from 35 to 39.6 and it was part of 
a $4 trillion deal, would that have a negative impact on growth 
in our economy?
    Dr. Elmendorf. So we actually did last fall, for the Senate 
Budget Committee, provide estimates of the effects on the 
economy of different ways of extending the expiring tax 
provisions, and extending them had the negative effect of 
reducing deficits, the positive effect of keeping marginal tax 
rates lower and, thus, encouraging work and saving.
    In our estimates, the negative effects of the extra debt 
was larger than the positive effects of lowering marginal tax 
rates for those particular policies we looked, again, over the 
medium and longer term. But that is why the answer really 
depends on the specifics of the policies.
    Senator Kerry. Thank you very much. I appreciate it.
    Chairman Murray. Representative Camp?
    Representative Camp. Well, thank you, Co-Chair.
    Mr. Elmendorf, is there anything in the Budget Control Act 
that would prevent the Congress from changing how the sequester 
would affect defense spending?
    Dr. Elmendorf. I mean, the Congress could enact a change in 
law that could override the Budget Control Act.
    Representative Camp. So there is nothing in the Budget 
Control Act that would prevent that?
    Dr. Elmendorf. No. I mean, in general, as you know, any 
Congress can reverse the actions of a previous Congress.
    Representative Camp. I appreciate your response to a 
question by Senator Murray that you believe that your 
projections on GDP growth are too generous and that you believe 
actually they would be lower, which would mean actually our 
deficit is worse than you have projected in the past. But under 
your projections, you are assuming a 30 percent cut to 
physicians in Medicare, are you not?
    Dr. Elmendorf. Yes.
    Representative Camp. And you are assuming that taxes go up 
$3.8 trillion, that everybody's taxes go up, certainly would 
have a detrimental effect on the economy. And you are assuming 
that there is a cut in discretionary spending.
    So, as you project that and in answer to Mr. Upton's 
question that deficits are going to decline as a percentage of 
our GDP, it is based on all of these assumptions, which, 
frankly, would impact that number particularly in one way. I 
would just have to say----
    Dr. Elmendorf. As you know, Congressman, it is not our 
assumptions. We are following current law in that way.
    Representative Camp. But these are assumptions you baked 
into your proposals, into your testimony today. I am just 
trying to point that out.
    And under either of your long-term fiscal projections, 
spending on entitlements or mandatory health programs, Social 
Security, et cetera, will increase between 15 and 17 percent of 
GDP, of our gross domestic product. And net interest costs will 
increase to between 4 and 9 percent. And under either of those 
scenarios, that crowds out discretionary spending, even if 
assuming the highest levels of revenue this country has even 
seen.
    So I guess my question is under even the best of 
assumptions, the rosiest of assumptions, total discretionary 
spending under that sort of long-term scenario was about 1 
percent of GDP versus the 9.3 percent it is today. And I guess 
I would say to you, your response to that suggestion or those 
calculations, do they sound correct to you?
    Dr. Elmendorf. So, again, I don't have our long-term 
numbers at hand. We extrapolate--for our projections over the 
long term also, we extrapolate discretionary spending according 
to some simple rule of thumb. What the Congress ultimately did 
when it reached an unsustainable point, we can't predict.
    Representative Camp. Well, presuming my question then that 
if, under the rosiest of assumptions, given those long-term CBO 
projections that discretionary spending is just 1 percent of 
GDP, has that ever occurred in recent history?
    Dr. Elmendorf. Well, I mean, I don't know about the 18th 
century. But, no, it has not occurred in recent history.
    Representative Camp. In recent history. Relatively recent 
history.
    Dr. Elmendorf. No.
    Representative Camp. So we have never been at that level?
    Dr. Elmendorf. No.
    Representative Camp. And I think the question is could we 
operate a functioning Government at just 1 percent of 
discretionary spending of GDP?
    Dr. Elmendorf. Nothing like the Government that we are now 
accustomed to in either defense or nondefense programs.
    Representative Camp. And again, with your testimony that 
mandatory spending, as you said, dominates the Government 
budget I think was your quote. You also said it is a growing 
share of spending. It is growing rapidly. Doesn't this 
illustrate that as part of what we are trying to do, the need 
to rein in mandatory spending is obviously one of the 
priorities that we need to address?
    Dr. Elmendorf. Again, it is up to the committee to choose 
what changes in policy it wants, but certainly, a growth in 
mandatory spending, particularly for healthcare and also in 
Social Security, is the feature of the budget that makes the 
past unrepeatable. It is the change under current policies 
because of the aging of the population and the rising costs of 
healthcare that push up that spending in such a substantial way 
that require us as a country and you as our elected leaders to 
make choices to make the future different in some way from the 
past.
    And whether that is through changes in those programs or 
changes in tax revenues or changes in other Government programs 
is up to you, as you know.
    Representative Camp. Thank you.
    I yield back, Madam Chair.
    [Disturbance in hearing room.]
    Chairman Murray. The committee will be in order, please. 
The chair wishes to remind all of our guests that----
    [Disturbance in hearing room.]
    Chairman Murray. I would request that the Capitol Police 
restore order.
    The committee shall recess until we are in order. [Recess.]
    Chairman Murray. Thank you very much.
    Representative, you can continue.
    Representative Camp. No, I had yielded back, Madam Chair.
    Chairman Murray. All right. We will turn to Representative 
Van Hollen.
    Representative Van Hollen. Thank you, Madam Chairman.
    Thank you, Dr. Elmendorf, for your testimony.
    Just to be clear, if the Congress was to take action to 
repeal the defense portion of the sequester, all things being 
equal, that would make the deficit worse. Correct?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. Thank you.
    Let me just go back to I think sort of an overall theme 
here, which is that as a share of GDP, under current law, 
nondefense discretionary spending is shrinking dramatically 
over the next 10 years. Is that not the case?
    Dr. Elmendorf. Yes, that is right, Congressman.
    Representative Van Hollen. And in fact, it goes to below 3 
percent in your chart, Figure 6, which as a percent of the 
economy is about the lowest level since the Eisenhower 
administration.
    Now there have been many questions that relate to the level 
of nondefense discretionary spending during the 2007-2008 
period, which was a component of the Recovery Act. Just to be 
clear, in your response to Senator Kerry's question, I think 
you indicated very clearly that that spending as part of the 
overall Affordable Care Act actually helped prevent the economy 
from getting worse. Correct?
    Dr. Elmendorf. I think you mean the Recovery Act--
    Representative Van Hollen. Correct.
    Dr. Elmendorf [continuing]. In 2009 and 2010 and this year.
    Representative Van Hollen. That is right.
    Dr. Elmendorf. And we believe that cuts in taxes and 
increases in Government spending through that act increased 
output and employment relative to what would have occurred 
otherwise.
    Representative Van Hollen. That is right. And as we look 
forward in this committee, and I received a letter from you. I 
think the calculation of the Congressional Budget Office is 
that about a little over one-third of the current deficit that 
we face is a result of the fact that the economy is not at full 
employment. Is that right?
    Dr. Elmendorf. That sounds right. Yes, Congressman.
    Representative Van Hollen. So even though we have prevented 
things from getting a lot worse more quickly, clearly, we have 
a long way to go, and I wanted to follow up on a remark you 
made with respect to infrastructure spending where you said, 
``Many analysts think that the country should spend more in the 
area of infrastructure.''
    CBO, I know, has looked at infrastructure investments. Do 
you believe that that is an effective way to try and boost job 
growth, especially given the fact that we have over 14 percent 
unemployment in the construction sector?
    Dr. Elmendorf. Yes, Congressman. We think a variety of 
Government spending programs, if increased, or Government tax 
revenues, if reduced, would spur economic activity in the next 
few years.
    Representative Van Hollen. And I know CBO has also analyzed 
different forms of investment to see which would be more 
effective. There a lot of folks out there who are unemployed 
through no fault of their own and who are continuing to look 
for work. As I looked at your analyses, one of the most 
effective ways to boost consumer demand, which, of course, is a 
big soft spot, would be to extend support for people who are 
out of work through no fault of their own. Is that right?
    Dr. Elmendorf. Yes, Congressman.
    Representative Van Hollen. Thank you.
    And another issue that is looming on the horizon is as of 
the beginning of next year, the current payroll tax holiday, 
which is in effect for all working Americans, will lapse unless 
the Congress takes action. And if that were to lapse and that 
would mean that working people had less disposable income, 
especially at this point in time, that would also dampen demand 
in the economy, would it not?
    Dr. Elmendorf. Yes, Congressman.
    Representative Van Hollen. And all that dampening of demand 
would mean less economic growth and fewer jobs, would it not?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. Thank you.
    A lot of ground has, obviously, been covered here. I would 
just want to pick up on the question, comment really that our 
Congressman Upton made, and I think we are all very aware of 
the fact that the clock is ticking here. And in my view, we 
have to accomplish an awful lot in a very short period of time, 
especially given your constraints.
    And I really hope that this committee is able to complete 
its mission and come up with a package that serves two 
purposes. One is to try and get the economy moving again and 
put people back to work, and you have described some ways that 
that could be done in response to questions. And as you have 
also indicated, that can also help reduce the deficit over a 
period of time because the sooner you get people back to work, 
the more the economy gets back into gear, the more revenue that 
will come in.
    Secondly, we need to act to put in place a long-term, 
credible, deficit reduction plan that does that in a steady way 
without harming current jobs and economic growth, and we need 
to do it, I believe, in a balanced way, like every other 
bipartisan group that has looked at this challenge recently. 
And so, I hope we can complete that mission.
    As you have indicated in your testimony today and before, 
in that long-term picture, there are two big components. One is 
there is no doubt we have to get a grip on the increasing 
costs, as a result of the baby boom retirement, rising 
healthcare, no doubt about it. And there are smart ways to do 
it, and then there are ways that I think would impose a lot of 
unnecessary pain on Americans.
    But we need to reform the healthcare system so that we 
focus more on the value of care than the volume of care, more 
on quality than on quantity, and then we have to deal with the 
revenue issue. And we all know that in the past decade when 
folks at the very top were paying a little more, the economy 
performed just fine. Twenty million jobs were created. The 
economy was booming. And so, it seems to me that this is a time 
for shared responsibility to address our country's needs, and I 
think your testimony made that very clear.
    So thank you, Dr. Elmendorf.
    Thank you. Thank you, Madam Chairman and Mr. Chairman.
    Dr. Elmendorf. Thank you, Congressman.
    Chairman Murray. Senator Toomey?
    Senator Toomey. Thank you, Madam chairman.
    And thank you, Dr. Elmendorf.
    A couple of quick follow-ups here. First, I know it is your 
view that the recent huge increase in spending and the 
corresponding big deficits have generated more economic growth 
and more job creation than we would have had in the absence of 
those things. But surely you would agree that that essentially 
asks for a comparison to a counterfactual, and as such, it is 
completely impossible to prove?
    Dr. Elmendorf. Yes. That is right, Senator.
    Senator Toomey. Okay. I would just urge us to consider that 
there is another theory here, which is that Government can't 
really create demand on balance. It can substitute public 
demand for private demand, but that it is illusory to think 
that the Government can simply step in and make up for what is 
perceived to be a shortfall of private sector demand.
    And by the way, I would suggest that there are governments, 
such as Greece and Italy and Portugal and Spain, who have 
created a lot of demand domestically through their excessive 
spending, and it is not working out so well for them.
    I wanted to follow up on something. I might have 
misunderstood this, but I thought I heard someone suggest that 
nondefense discretionary spending has been essentially flat for 
about the last decade. And I think we have touched on this in 
various ways, but I just want to be very clear. In fact, by any 
reasonable measure, nondefense discretionary spending has grown 
dramatically, I would say.
    The numbers I have are in 2000, we spent about $284 billion 
in nondefense discretionary spending. In 2010, we spent $550 
billion. We have had a slight reduction in 2011. But this is 
growing, obviously, in nominal terms. It is growing in 
inflation-adjusted terms. It is growing faster than inflation 
plus population growth. It is growing faster than GDP, in fact. 
Isn't that true?
    Dr. Elmendorf. I think that is correct about outlays, 
Senator, and I do show that in one of the figures. The issue, 
though, worth pointing to is that funding, meaning the new 
budget authority the Congress is providing for nondefense 
discretionary purposes, is actually now back down already in 
fiscal year 2011 as a share of GDP to roughly what it was over 
the preceding few decades. And you can see that in Figure 6 of 
the testimony.
    Now you are right as in terms of nominal dollars or in 
terms of real inflation-adjusted dollars, it is certainly up.
    Senator Toomey. Right.
    Dr. Elmendorf. And as a share of GDP, though, there is a 
sharp distinction between the level of outlays in 2011, which 
depended on previous year's funding, and the level of funding 
in 2011, which is the jumping off point for future discussions 
of appropriations.
    Senator Toomey. My point is over this 10-year period, we 
have seen huge growth in nondefense discretionary spending.
    The last point I would just like to ask is I think it is 
your view, but I would like to ask, is it your view that if we 
were to pursue revenue-neutral tax reform that would have the 
effect of broadening the base on which taxes are applied and 
lowering marginal rates, that it is true both with respect to 
such corporate reform or individual reform that that would have 
a pro-growth effect on the economy, which, of course, in turn 
generates more income for the Government?
    Dr. Elmendorf. Yes, that is right. Again, the amount would 
depend on the specifics of the proposal.
    Senator Toomey. Absolutely. But to the extent that we 
pursued that, we would be generating economic growth, therefore 
jobs and revenue for the Treasury?
    Dr. Elmendorf. Yes, Senator.
    Senator Toomey. Great. Thanks very much.
    Chairman Murray. Dr. Elmendorf, thank you very much for 
coming today and testifying.
    And I want to thank all of our members for being short and 
concise. We have a lot of work to do and a shrinking amount of 
time to finish it with.
    Dr. Elmendorf, thank you to you and your entire team for 
the tremendous amount of work that we are putting forward to 
you, and appreciate all of that.
    I do want Members to know that they have 3 business days to 
submit questions for the record, and I hope the witnesses can 
respond very quickly to that. So Members should submit their 
questions by the close of business on Friday, October 28th.
    Chairman Murray. I would also like to inform everyone that 
we are going to have another hearing on November 1st. The topic 
will be ``An Overview of Previous Debt Proposals.'' We will be 
hearing from former Senator Simpson, Erskine Bowles, Alice 
Rivlin, and former Senator Pete Domenici.
    Without objection, this joint committee stands adjourned.
    Dr. Elmendorf. Thank you, Senator.
    [Whereupon, at 11:45 a.m., the committee was adjourned.]


                  OVERVIEW OF PREVIOUS DEBT PROPOSALS

                              ----------                              


                       TUESDAY, NOVEMBER 1, 2011

                        United States Congress,    
                                 Joint Select Committee    
                                      on Deficit Reduction,
                                                    Washington, DC.
    The committee met, pursuant to call, at 1:37 p.m., in Room 
1100, Longworth House Office Building, Hon. Jeb Hensarling [co-
chairman of the joint committee] presiding.
    Present: Representatives Hensarling, Becerra, Camp, 
Clyburn, Upton, and Van Hollen.
    Senators Murray, Baucus, Kerry, Kyl, Portman, and Toomey.
    Chairman Hensarling. The committee will come to order.
    Before I recognize myself for an opening statement, I wish 
to make a few preliminary remarks.
    Number one, I wish to remind all of our guests that the 
manifestation of approval or disapproval, including the use of 
signs or placards, is a violation of the rules which govern 
this committee. The chair wishes to thank our guests in advance 
for their cooperation in maintaining order and decorum.
    This is the fourth hearing of the Joint Select Committee on 
Deficit Reduction, entitled ``Overview of Previous Debt 
Proposals.''
    I want to thank our witnesses. First, I wish to thank them 
for their service to their country, all long-time, storied 
public officials.
    Senator Alan Simpson, who served as a Senator from Wyoming 
for 18 years, served as chairman of the Veterans Committee, a 
member of the Finance, Judiciary, and Aging Committee, and 
obviously the co-chair of President Obama's National Commission 
on Fiscal Responsibility and Reform.
    Additionally, Erskine Bowles, who served as chief of staff 
to President Bill Clinton and was appointed by President Obama 
to also co-chair the National Commission on Fiscal 
Responsibility and Reform.
    Senator Pete Domenici, the longest-serving Senator in New 
Mexico's history, although New Mexico is still a fairly young 
State; a storied career as chairman of the Budget Committee; 
serves as a senior fellow at the Bipartisan Policy Center.
    Finally, Dr. Alice Rivlin, who was a vice chairman of the 
Federal Reserve, director of the OMB in the first Clinton 
administration, and the founding director of the Congressional 
Budget Office, and served with Senator Domenici on the 
Bipartisan Policy Center's Task Force for Debt Reduction.
    Again, I want to thank each of our witnesses for their 
work. There are many other fine organizations and think-tanks 
that have added value to the process. This particular committee 
chose to hear from these four individuals and these two bodies.
    With that, the chair will now yield to himself for an 
opening statement.

OPENING STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE 
  FROM TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Chairman Hensarling. What I do believe we will hear from 
each of our witnesses is that America at least does indeed face 
a legitimate debt crisis. Not only are we operating on borrowed 
money, we are operating on borrowed time as well.
    In that vein, I never tire of reminding not only myself but 
the public and my colleagues that although we have a statutory 
goal to reduce the growth of the deficit over 10 years by $1.5 
trillion, backed up by a $1.2 trillion sequester should we 
fail, more importantly we have a statutory duty to proffer 
legislation that would significantly improve the Nation's long-
term fiscal imbalance.
    What could not be clearer is that unless we offer 
fundamental and structural reforms to our Nation's entitlement 
programs, especially health care, we will not only end up 
failing in our duty, we may fail our Nation as well.
    Health-care costs, measured by GDP, roughly have doubled 
since the time of my birth until I entered the workforce and 
have risen about two-thirds since then and are growing at what 
all acknowledge to be an unsustainable rate. Every agency and 
think-tank that I am aware of, every academic study shows that 
Medicare will go broke in 9 to 13 years. The President himself 
has said, ``The major driver of our long-term liabilities--
everybody here knows it--is Medicare and Medicaid and our 
health-care spending. Nothing comes close.'' I continue to 
agree with the President.
    Unfortunately, Social Security faces its problems as well. 
My children will likely put more money into Social Security 
than they take out--at best, generational unfairness; at worst, 
a form of generational theft.
    We have previously heard from the Congressional Budget 
Office that tax revenues, upon the recovery of this economy, 
will once again produce roughly 18.5 percent of GDP. We also 
know that there are many tax increases that are already built 
into current law. But spending, principally driven by our 
health-care and retirement programs, is due to roughly double 
in size, to 40 percent of GDP, over the course of a generation 
from where it was just a few short years ago.
    Certainly, we cannot tax our way out of this crisis. We 
cannot solve it by simply tinkering around the edges of our 
entitlement programs. For the sake of our economy, our jobs, 
our National security, and our children's future, many people 
say it is time to, ``go big.'' I agree, but going big is not 
merely measured by slowing the rate of growth of the deficit 
over the next 10 years. Going big must be measured in solving 
the problem--in other words, fundamental and structural reforms 
of our entitlement programs, giving every American the 
opportunity for quality health care and quality retirement 
security at a cost that does not harm our jobs and diminish our 
children's future.
    [The prepared statement of Chairman Hensarling appears in 
the appendix.]
    With that, I will now yield for an opening statement to my 
co-chair, Senator Murray of Washington.

  OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM 
  WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Co-Chair Murray. Thank you very much, Co-Chair Hensarling.
    And I want to thank all of our colleagues and especially 
our witnesses who have all come today. We really appreciate 
your being in front of this committee today. And I want to 
thank all the members of the public who are joining us, as 
well.
    We have all been working very hard over the past 2 months, 
but with 23 days left to go until our deadline and with even 
less time before we need to have a plan ready to be voted on, 
we are now entering the critical final phase of this process. 
And, as we all know, the consequences of failure are 
unacceptable. The triggers that have been put in place would be 
devastating for our National defense and for middle-class 
families and the most vulnerable Americans that depend on this 
country for things like education and housing and even 
nutrition assistance for women and infants.
    Markets, rating agencies, and businesses across the country 
are watching closely to see if Congress can solve this problem. 
And the American people are looking to us to break out of the 
gridlock and partisan rancor that has dominated D.C. recently 
and to deliver the kinds of results that they expect and they 
deserve.
    That is why members of this committee have been clear: We 
need to find a way to come together around a bipartisan deal. 
So I believe it is very appropriate that we are having this 
hearing with these witnesses as we move into these final few 
weeks.
    Before us we have Democrats and Republicans who were able 
to come together around big and balanced proposals that tackle 
some of the most difficult challenges facing our Nation. The 
two groups went about it in slightly different ways, and I 
don't agree with each piece of each plan, but they provide 
serious models for big and balanced bipartisan proposals.
    And as I know we will hear more about it today, these 
proposals achieved bipartisan support and came together only 
because they were balanced, they included concessions from all 
sides, and they required all Americans to share in the 
sacrifices that this endeavor calls for. Neither of these 
bipartisan proposals included only spending cuts, and they 
didn't simply address entitlements or only raise revenues. They 
put everything on the table. They made tough decisions, and 
because of that, they were able to put together balanced 
packages that garnered bipartisan support.
    So, as this committee moves into the home stretch, hearing 
more about the importance of a balanced approach is going to be 
very helpful. As our witnesses today can address, a bipartisan 
deal isn't possible if Members refuse to come out of their 
partisan or ideological corners. It is not enough for either 
side to simply say they want to reduce the deficit. Now is the 
time when everyone needs to be putting some real skin in the 
game and offering serious compromises.
    Democrats have made clear that we are prepared to do that. 
We have said we are very open to painful concessions and 
compromises if Republicans are, as well. And we have put 
forward serious ideas to reflect that. But these concessions 
will only be made and only considered in the context of a 
balanced deal that doesn't just fall on the middle class and 
most vulnerable Americans. But that requires big corporations 
and the wealthiest among us to share in the sacrifice.
    The American people realize that. They overwhelmingly 
support a balanced approach, which is why this is the kind of 
deal every bipartisan group that has successfully tackled this 
issue has made. It is the kind of solution I am looking forward 
to hearing more about from our witnesses today, and it is the 
kind of deal I hope that every member of this committee is 
prepared to make.
    So, again, I want to thank our witnesses for being here 
with us to have this critical conversation. The bipartisan, 
balanced plans that you have put forward provide a strong 
foundation for this committee, and we look forward to hearing 
your testimony and having a chance to ask our questions. So, 
again, thank you to all of you for being here today.
    [The prepared statement of Co-Chair Murray appears in the 
appendix.]
    Chairman Hensarling. Thank you, Senator Murray.
    And now we will hear from our panel. I have no idea why you 
are seated in this order, but we are going to start with you, 
Mr. Bowles.
    Each witness will be recognized for 5 minutes, at which 
time members will have 10 minutes for questions.
    Mr. Bowles, we are now prepared to receive your testimony.

 STATEMENT OF ERSKINE BOWLES, CO-CHAIR, NATIONAL COMMISSION ON 
                FISCAL RESPONSIBILITY AND REFORM

    Mr. Bowles. Thank you, Mr. Chairman. I am delighted to be 
here. I am delighted to be in the company of these three great 
Americans. And I want to thank you for inviting me to come.
    Both Alan and I thought long and hard about what we wanted 
to say today. We have submitted something in writing to you, 
but, instead, I would like to just speak to you from a few 
notes I have made.
    I know most of you. I have worked closely with almost all 
of you on both sides of the aisle. I have great respect for 
each of you individually, but, collectively, I am worried you 
are going to fail--fail the country.
    When Alan and I first got into this, we thought we were 
doing it for our 15 grandkids. I have nine, and he has six. But 
the closer we got to the numbers, the more we realized we 
weren't doing it for our grandkids, we weren't even doing it 
for our kids; we were doing it for us. That is how dire the 
situation is today.
    I think that we face the most predictable economic crisis 
in history. I know that the fiscal path we are on here in 
Washington is not sustainable. And I know that each of you know 
it and you see it, because it is as clear as day.
    When Alan and I travel around the country and we talk to 
people and we ask them, why do you think we have these 
deficits, they tell us, oh, it's got to be waste, fraud, and 
abuse, it's got to be foreign aid, oil company subsidies. And, 
yes, all of those are a small part of the problem. But the big 
problem really comes from four sources, and you know it.
    The first is health care. We spend twice as much as any 
developed country in the world on health care. And, 
unfortunately, if you look at the outcomes, our outcomes don't 
match the outlays. We rank somewhere between 25th and 50th in 
things like infant mortality, life expectancy, preventable 
death. And so the rapid growth of health care and the 
unsustainable growth of health care is our number-one problem.
    The second biggest problem today, I believe, is that we 
spend in this country more than the next 14 largest countries 
combined on defense. Admiral Mullen, Chairman of the Joint 
Chiefs of Staff, who just stepped down, recently said that our 
biggest national security problem is these deficits and this 
debt because it will consume every dollar of resource we have. 
We believe that we have to make reasonable cuts in defense.
    Third, I believe that we have the most ineffective, 
inefficient, anticompetitive tax system that man could dream 
up. What we believe you need to do is broaden the base, 
simplify the Code, eliminate or at least greatly reduce this 
backdoor spending that is in the Tax Code, and use that money 
to bring down rates and reduce the deficit.
    And the fourth cause of the deficit is simply interest on 
the debt. And if there is one thing I am familiar with, it is 
the power of compound interest. And when interest rates go back 
to normal, this country is going to experience the power of 
compound interest.
    This is a problem we can't grow our way out of. We could 
have double-digit growth for decades and not solve this 
problem. And, as the chairman said, it is not a problem we can 
solely tax our way out of. Raising taxes doesn't do a darn 
thing to change the demographics of a country or change the 
fact that health care is growing at a faster rate than GDP. And 
it is also not a problem that we can solely cut our way out of. 
I think you all have proven that over the last year.
    That is why our commission came up with a balanced plan of 
$4 trillion of deficit reduction over the next decade. We 
didn't make the $4 trillion number up because the No. 4 bus 
rode down the street. Four trillion is not the maximum amount 
we need to reduce the deficit, it is not the ideal amount, it 
is the minimum amount we need to reduce the deficit in order to 
stabilize the debt and get it on a downward path as a percent 
of GDP.
    We based this proposal on six basic principles. Those 
principles are that we shouldn't do anything to disrupt a very 
fragile economic recovery, so we made very light cuts in 2011 
and 2012 and did not get spending back to pre-crisis levels in 
2013, when we did get it back to pre-crisis levels in real 
terms.
    Secondly, we didn't want to do anything that hurt the truly 
disadvantaged, so we didn't make any big cuts or any cuts in 
things like food stamps or SSI or workers' comp. And we 
actually did some things to improve Social Security, while 
making it sustainably solvent.
    Third, we do want to make sure this country is safe and 
secure, but we have to realize, as Admiral Mullen said, that 
our biggest national security problem is these deficits.
    Fourth, we thought the President was right, or at least 
half-right, in his State of the Union when he said America must 
invest in education, infrastructure, and high-value-added 
research if we are going to be competitive in a knowledge-based 
global economy. What he left out is we have to do it in a 
fiscally responsible manner. We live in a world of limited 
resources; that means choices and priorities.
    Fifth, as I said earlier, we believe we have to revise the 
Tax Code, simplify the Tax Code to broaden the base, to reduce 
the tax expenditures, and use the proceeds to reduce rates and 
to reduce the deficit.
    And, lastly, we have to be serious about spending cuts. We 
have to cut spending wherever it is, whether it is in the Tax 
Code, the defense budget, the nondefense budget, discretionary 
budget, or the entitlement budget.
    I believe if you all go big, if you are bold, and if you do 
it in a smart manner, that the American people will support you 
if you make these big, bold, smart decisions. I hope for the 
country's sake you will.
    Thank you very much.
    Chairman Hensarling. Thank you, Mr. Bowles.
    Senator Simpson, you are now recognized.

  STATEMENT OF ALAN SIMPSON, CO-CHAIR, NATIONAL COMMISSION ON 
                FISCAL RESPONSIBILITY AND REFORM

    Mr. Simpson. Senator Murray and Representative Hensarling, 
it is a pleasure to be here.
    I look at this panel, and I, too, know many of you. But at 
this stage of life, I have been around the track a while in 
this game. Never worked with finer people than Erskine and 
Alice and Pete, and have been working through years.
    We don't need charts when we go out. We don't use 
PowerPoints. We just say, if you spend more than you earn, you 
lose your butt. And if you spend a buck and borrow 42 cents of 
it, you got to be stupid. Now, people do hear that. It is a 
rather wretched thing to say. And then you say, today your 
country is borrowing $4.6 billion and will borrow that tomorrow 
and the next day and the next day. If that has any common sense 
to the American people, it certainly has escaped us.
    Now, my dad was a Governor and U.S. Senator. I know the 
game of inside baseball, and I know many of you well. As we 
wandered through this place a year ago, people came up and 
said, ``Save us from ourselves.'' That is not a very smart 
thing to say in the duties you have to perform. So this is the 
toughest thing you have ever been in or ever will be in, 
without question, what you are doing. You have my deepest 
admiration and respect, all of you.
    And you all know what you have to do. In your gut, you know 
what you have to do.
    So some will say, well, you and Erskine have nothing to 
lose; you are not in the game. Well, that is true. But Dick 
Durbin and Tom Coburn had a lot to lose--a couple of diverse 
ideological allies. They had something to lose, and they 
stepped right up to the plate and did it. They voted for our 
report. There were five Democrats, five Republicans, and one 
independent.
    I used to take these people on when I was in the Congress. 
I did not do this suddenly. I am the only living person that 
had a hearing on the AARP. They went goofy, absolutely 
ballistic. ``Why would you have a hearing on us? We do great 
things.'' Well, that is enough of that.
    So anyway, I have dealt with professional veterans, I have 
dealt with extremists of the senior citizens, I have dealt with 
emotion, guilt, fear, racism, I did immigration, Social 
Security. I have done it all. And I never lost an election.
    I dealt with Peter Rodino, a great Democrat, and Ron 
Mazzoli. We did things. I took on the professional veterans. I 
never heard anything out of Lloyd Bentsen and Bob Dole and Dan 
Inouye when did we veterans stuff. It was always from some guy 
that had never done anything, never even been in the military.
    And in immigration I was called a bigot and a racist, and 
yet that bill brought 3 million people out of the dark. I was 
very proud of that. But it never got very far because the right 
and the left said, this is a national ID card, heh, heh, heh. 
That came from the right and the left.
    People admire guts and courage. They may fight you, they 
may vilify you, but they will admire you. I have been the toast 
of the town one day and toast the next. I have been on the A 
list and the Z list in this town when I was here. It is a funny 
place. You are on the cover of Time one month, and 6 months 
later you are doing it.
    And just a quick note about Grover Norquist. If Grover 
Norquist is now the most powerful man in America, he should run 
for President. There is no question about his power. And let me 
tell you, he has people in thrall. That is a terrible phrase. 
Lincoln used it. It means your mind has been captured; you are 
in bondage with the soul.
    So here he is. I asked him, he said, my hero is Ronald 
Reagan. I said, ``Well, he raised taxes 11 times in his 8 
years.'' He says, ``I don't know, I didn't like that at all.'' 
I said, ``Well, he did it. Why do you suppose?'' He said, ``I 
don't know. Very disappointing.'' I said, ``Probably did it to 
make the country run.'' Another sick idea.
    And let's just look at the AARP. Just this morning, I saw 
that ad. That is the most disgusting--the most disgusting--ad I 
have ever seen. I don't know what the people got paid, 
especially the actors, but I can tell you this, they are well 
paid. They said, ``We are 50 million. We are watching you. We 
remember, and we vote.'' I tell you, that is a really ugly 
thing.
    But let me tell you about the AARP. Let's remember what 
they will be when they do nothing. We asked them what they 
would do to help, and they had said, we have two things we will 
tell you. They never did. But let me tell you what will happen 
with their view of the world, which is to do nothing to restore 
the solvency of Social Security. In the year 2036, you are 
going to waddle up to the window and get a check for 23 percent 
less. And then I hope that they will remember the AARP. I 
certainly will, and a lot of young people will too.
    So anyway, it is a tough job, and you are going to have to 
do it. People are out there who are going to say, I have helped 
you forever, and now I never ask you for a thing, but here we 
are. And that is going to put a lot of heat. Well, the market 
will call the shots from now on. Won't need anything but that. 
Interest rates will go up, inflation will go up by the failure. 
And guess who gets hurt? The little guy. The vulnerable guy 
that everybody babbles about day and night will be the one hit 
with the hammer on the schnozz.
    So remember the definition of ``politics.'' In politics 
there are no right answers, only a continuous flow of 
compromises among groups resulting in a changing, cloudy, and 
ambiguous series of public decisions where appetite and 
ambition compete openly with knowledge and wisdom.
    Thank you very much.
    [The prepared joint statement of Mr. Bowles and Mr. Simpson 
appears in the appendix.]
    Chairman Hensarling. Thank you, Senator.
    Dr. Rivlin, you are now recognized.
    Dr. Rivlin. I am going to defer to my colleague, Senator 
Domenici, if that is all right, to go first.
    Chairman Hensarling. Absolutely.
    In that case, Senator Domenici, you are recognized. If you 
could pull the microphone a little closer to you, Senator.

STATEMENT OF HON. PETE DOMENICI, CO-CHAIR, DEBT REDUCTION TASK 
                FORCE, BIPARTISAN POLICY CENTER

    Mr. Domenici. Thank you, Mr. Chairman. I just wanted to 
say, the reason she asked for that privilege is we have our 
discussion with you planned in that order. And so we thank you 
very much.
    First of all, let me say to the two co-chairs and the 
members of the committee, thank you for the opportunity to 
discuss with you today both the economic and fiscal challenges 
our Nation faces and our comprehensive plan to stabilize the 
national debt.
    More than 18 months ago, Dr. Alice Rivlin and I decided 
that we should continue our decades-long work for a rational 
Federal fiscal policy. Our only stipulation was that everything 
is on the table. She and I agreed. We then invited 17 other 
members to join us in what became the Bipartisan Policy 
Center's Debt Reduction Task Force.
    I tell you all of this because I think the history of the 
men and women that worked on this is very important to show you 
what kind of Americans we have out there who are worried about 
the future and will step up to the table and do what is 
necessary. The condition of their membership, those that joined 
us, was that they, too, would agree that everything was on the 
table.
    Our task force ranged from Mayor Marc Morial of New Orleans 
to former Oklahoma Governor Frank Keating. Imagine the 
difference in the two. Some of you know. Yet they agreed. They 
agreed that we were in trouble, and they agreed that we had to 
solve the problem. We had liberals, conservatives, think-tank 
budget policymakers, former members of Presidential cabinets, 
people with business and labor experience. Our task force was 
as diverse a group of serious American citizens as you could 
get to address what we all believed is a looming crisis for our 
Nation.
    Last November, we issued our report. It has been much 
discussed, and you and your staffs have seen it. Our 
recommendations, after many days, were unanimous. And they were 
controversial, as they should be, because they were also 
serious. Individually, each of us might have preferred a 
different mix of solutions, but each compromised to find a set 
of policies that we could all support.
    Since then, we have seen unemployment continue to exceed 9 
percent, our economy continue to stagnate. At the same time, we 
have endured a damaging fight over the debt-ceiling increase. 
We have seen another series of the melodramas on annual 
appropriations. And we have seen another year of deficits 
exceeding $1 trillion and a debt that had ballooned to over $10 
trillion--that is, the debt held by the public.
    With spending projected to grow faster than revenues, we 
will be forced to borrow more and more every year if we do not 
change our policies. This fiscal projection is clearly 
unsustainable. Now, everybody has to learn that word because 
that is probably the best word to explain where we are. We are 
an America with an unsustainable economic policy, and it will 
ruin us sooner or later.
    This unsustainable nature has been so attested to by the 
Federal Reserve Chairman, Ben Bernanke; the head of the 
International Monetary Commission; President Obama; and almost 
all fiscal experts have used that word, ``unsustainable.'' You 
are there trying to fix the unsustainable and make it 
sustainable.
    Righting our fiscal house will take three things: renewed 
economic growth; cutting Federal spending, especially 
entitlements, driven in large part by Medicare and Medicaid; 
and pro-growth fundamental tax reform that yields significant 
net new revenues.
    The Medicare proposal that Alice and I present to you today 
is the only reasonable bipartisan plan to fundamentally reform 
that program, make it more efficient, and preserve it for 
future generations.
    We also present to you a comprehensive pro-growth tax 
reform that clears out all the special interests that are in 
the Code. We, like our friends who chaired the President's 
commission--and I listened carefully to their recommendations 
today--they recommended a fairer and simpler tax system. We 
have one similar to it, but I would think that, if you look 
carefully at it, it better solves the problem that we have 
today.
    Now, let me be blunt. A plan that does not fundamentally 
restructure Medicare and other health entitlements will fail to 
adequately address the debt crisis that we face. Both sides, 
those who are against any fundamental health entitlement reform 
and those who oppose any revenue increases, will be equally 
complicit in bringing the Nation closer to the fiscal brink.
    I hope you heard that. I said it, and it is not like me. I 
don't usually say that about things. But I did say, if we don't 
do this, those who are for fixing health care and those who are 
for tax increases, and they say, ``We will do not one without 
the other; we will do only one,'' then they are both complicit 
in letting America destroy itself, letting this great democracy 
destroy itself, because we don't want to make tough decisions.
    Additionally, while not currently the largest driver of our 
deficits, Social Security finances are unstable, and we must 
soon take action to implement some small fixes that will keep 
the system on solid ground for generations to come. And that 
can be done. That is not so difficult. Citizens will understand 
that.
    What will happen if we continue to try to wriggle around 
these facts? When the debt-ceiling-increase battle caused 
short-term disturbances in the markets, when that happened, I 
had hopes that the fiscal reality would push the President and 
the Congress to real, fundamental action. Then, because of the 
turmoil in North Africa and the European debt problems of the 
highest order, investors rushed into quality, seen as the 
American sovereign debt. So instead of seeing higher interest 
rates for American debt, we have seen much lower interest 
rates. Instead of the stock market collapse, Dow Jones has been 
rising and going down steadily and on the upside during the 
last month. That is not normal for the situation we are in, but 
I just told you why it was.
    So, are those of us who predict serious, perhaps 
calamitous, consequences for our fiscal policies, are we wrong? 
I think not. Right now, to borrow a phrase, American debt is 
the best house in a truly terrible neighborhood. Yes, we have 
rats, holes in the roof, and grass growing window-high, but 
other houses for global investors to store their money are even 
worse. And that accounts for us having lower interest rates.
    However, it won't always be so. The neighbors might fix 
their houses or the whole neighborhood might burn. Either way, 
we will pay for our neglect with slower future growth. And that 
is the death knell for those in middle America who have been 
part of America's prosperity. Future growth and a less 
prosperous country, far less able to play a leading role in the 
world, is what we will present to the world if we don't fix 
this problem.
    I am told that the Joint Select Committee doesn't have the 
time to truly do comprehensive reform. I believe it can create 
time through a fast-track mechanism using section 404 of your 
enabling legislation, and which we expand upon in the appendix 
documents in your folder. And I can say to you, those in your 
folder from us today, the five or six, make real sense and give 
you answers to almost every problem that you have before you.
    I am told that the wise exchange of short-term political 
pain for long-term fiscal gain won't happen. I hope that is not 
true. Without substantial new revenues and structural 
entitlement reform, our fiscal ship is destined to capsize.
    I am told that we need to put these kind of tax and 
entitlement changes off until 2013, an odd-numbered, 
nonelection year. Well, 2011 is an odd-numbered nonelection 
year. And although I am not making a prediction, we might not 
get to the next one unscathed. I am saying we might have the 
calamity before that event.
    I know that the JSC has enormous power. What I don't know 
is whether or not they will use that power. Now, I have left 
one remark that was very important--I left it out here, and I 
want to find it so we can be sure that you understand--that 
those who say they will not support tax revenues unless we have 
entitlements, that is a good position if, in fact, you are 
saying, I will do it if we get both. But both are complicit. If 
they fail to act because each blames the other, they will both 
be complicit if they don't both cooperate in participating in 
this deficit reduction. Not one, not the tax raisers, not the 
entitlement cutters, but both will be complicit and will have 
caused America to suffer what we have described here today.
    I thank you very much.
    Chairman Hensarling. Thank you, Senator Domenici.
    Now we will turn to Dr. Rivlin. You are recognized.

 STATEMENT OF DR. ALICE RIVLIN, CO-CHAIR, DEBT REDUCTION TASK 
                FORCE, BIPARTISAN POLICY CENTER

    Dr. Rivlin. Thank you, Co-Chairs Murray and Hensarling and 
members of the committee.
    I share Senator Domenici's views and those of Mr. Bowles 
and Senator Simpson that this committee can change the course 
of economic history for the better.
    The United States faces two huge challenges at once: 
accelerating growth in job creation and reducing future 
deficits to stabilize the debt. There is no choice between jobs 
and fiscal responsibility. Both are essential, and they 
reinforce each other. This committee, with its extraordinary 
powers, has the opportunity and the obligation to address both 
challenges.
    To achieve success, the committee will have to go well 
beyond the minimum charge of $1.2 trillion in savings over the 
next 10 years, because even savings of this magnitude would 
leave the debt rising faster than the economy can grow. We 
believe you should craft a grand bargain involving structural 
entitlement and tax reform that would save at least $4 trillion 
over 10 years. To do so, the committee should take full 
advantage of the authority given to you in section 404 of the 
act and write instructions to authorizing committees to produce 
tax and entitlement reforms to be considered on a fast track.
    A grand bargain would reduce the chances of a devastating 
double-dip recession that could lead to a stagnant lost decade. 
It would also reassure citizens and markets that our political 
process is functioning in the public interest, not stuck in 
partisan gridlock or overwhelmed by special interests.
    I was privileged to serve on both the Simpson-Bowles 
Commission and the Domenici-Rivlin Task Force. Both groups 
worked hard to find a combination of policy changes that would 
enhance growth and put the budget on a sustainable path. The 
arithmetic of the problem, far more than political 
considerations, drove them to similar proposals. Both concluded 
that two major course changes were essential: structural reform 
in health programs, especially Medicare, and comprehensive 
reform of the individual and corporate income taxes that would 
raise more revenue from a more pro-growth tax system. Both also 
advocated freezes in domestic and defense discretionary 
spending to encourage weeding out low-priority activities in 
favor of more important ones.
    The Budget Control Act capped discretionary spending. We 
believe that further reductions in discretionary spending would 
risk harming essential government functions. For the same 
reason, we urge you to avoid the sequester. Instead, this 
committee should focus on reducing the growth of health-care 
spending and reforming the Tax Code. Our report offers solid 
bipartisan proposals to do this.
    Our proposal for Medicare reform, which we call ``defined 
support,'' would preserve traditional Medicare for all seniors 
who prefer a fee-for-service system. It would also offer an 
array of comprehensive health plans competing with traditional 
Medicare to deliver the same benefits. Plans could not refuse 
any Medicare beneficiary and would be compensated on a risk-
adjusted basis. The Federal contribution would be determined by 
competitive bidding on a regional exchange.
    We believe that the competition on a well-regulated 
exchange would lead providers and plans to deliver care more 
cost-effectively and reduce spending growth. As a fail-safe, 
the Federal contribution would be capped at GDP growth plus 1 
percent. Excess costs, if any, would result in an increased 
premium, but low- and moderate-income beneficiaries would be 
protected from these increased payments. This bipartisan 
proposal would preserve Medicare for our rapidly rising 
population of seniors.
    On tax reform, while growth in spending must be controlled, 
we do not believe that the projected tsunami of retirees can be 
absorbed by Federal programs without increasing revenues. 
Stabilizing the debt by spending cuts alone would cripple 
essential government functions and responses to human needs.
    Moreover, as our colleagues have stressed, our current Tax 
Code is riddled with exclusions, exemptions, deductions, and 
other special provisions that distort economic activity, narrow 
the tax base so much that rates are unnecessarily high. Our 
proposed Tax Code would have only two individual rates, 15 and 
28 percent, and one corporate rate, 28 percent. Most special 
treatment of income or spending would be eliminated or phased 
out. Capital gains, dividends, and so-called carried interest 
would be taxed at ordinary rates. Credits would be allowed for 
earned income, children, charitable contributions, mortgage 
interest on primary residences up to a limit, and retirement 
contributions. The exclusion of employer-paid health care from 
taxable income would be phased out, which we regard as both a 
tax and a health-care reform.
    We believe, like our colleagues, that this simpler Tax Code 
would be both fairer and more conducive to economic growth. It 
would raise more revenue than current policy, but less than 
current law, and do it in a more progressive fashion.
    We fully appreciate the difficulty of the choices facing 
this committee and hope you have the courage to restore fiscal 
responsibility and avoid the truly dire consequences of 
partisan gridlock.
    Thank you very much.
    [The prepared joint statement of Mr. Domenici and Dr. 
Rivlin appears in the appendix.]
    Chairman Hensarling. I thank you, Dr. Rivlin.
    Thank you for the entire panel.
    The chair will now yield to himself for 10 minutes.
    I believe one of the things I have heard from all of the 
panelists--and I have certainly heard the revenue message, and 
we will go back to that--but I think I heard particularly you, 
Senator Domenici, say that the number-one challenge that we 
have with respect to our debt is health care. Is that correct?
    And I think, Mr. Bowles, I heard you say something similar.
    Is there a consensus among the panel that the number-one 
challenge we face in our structural debt crisis is health care? 
No one is diverting from that?
    Dr. Rivlin, I have a question, then, for you.
    Mr. Domenici. Mr. Chairman, I want----
    Chairman Hensarling. Yes, Senator Domenici.
    Mr. Domenici. I just wanted to ask if they would put up the 
chart that is very explicit on this. You cannot miss it.
    Chairman Hensarling. If you have a number for me, I would 
be glad to have the staff put it up.
    Mr. Domenici. We don't use this, so I don't know--somebody 
said they would put it----
    Chairman Hensarling. I bet you somebody enterprising will 
be able to find that.
    Mr. Domenici. They showed me just before we met.
    Chairman Hensarling. ``Wake up, folks, it's health care.'' 
That appears to be how you entitled your slide. If the staff 
can pull that one up, please.
    Mr. Domenici. I would ask them if they could put it back.
    Dr. Rivlin. There it is.
    Chairman Hensarling. Well, that is one of them.
    Dr. Rivlin. That is it.
    Chairman Hensarling. That is it?
    Mr. Domenici. That is these various governmental functions 
versus GDP. And look which one, that blue line up there, that 
is health care. Look at the lines underneath. Those are big-
ticket items that people think--but look at what is happening 
to health care.
    I am going to give you a word. If we do not produce a plan 
that would permit CBO to say that the line has been bent--the 
line has been bent--if that isn't in the plan, then you have 
not caused in a major way a reform of health care. Because if 
that line keeps going that way, you have solved nothing. So it 
must start to bend someplace.
    Chairman Hensarling. So you are not speaking of simply 
slowing the rate of growth; you are talking about a plan that 
actually bends the cost curve.
    Mr. Domenici. That is correct. And that is what we do.
    Chairman Hensarling. Dr. Rivlin, having the honor and, 
actually, pleasure of serving with you and Senator Simpson and 
Mr. Bowles on President Obama's Fiscal Responsibility 
Commission, I was somewhat familiar with your plan, with House 
Budget Committee Chairman Paul Ryan, on a Medicare premium 
support system. And you now have what I believe you have called 
a defined support system. And as I was listening to your 
testimony, it includes an aspect of maintaining some facet of 
the current fee-for-service aspect of Medicare.
    But could you tell me why this form of defined support is 
critical to saving us from the national debt crisis? And how 
does it differ from your earlier premium support plan with 
Chairman Ryan?
    Dr. Rivlin. I think it differs in several respects. The 
most important one is the one you noted, that it preserves 
traditional Medicare for anyone who wants it. And I think that 
is important. It is important to seniors, and it is important 
to have--you should forgive the expression--a public option.
    But in addition to traditional Medicare, it sets up 
Medicare exchanges, where seniors would choose among an array 
of plans that provided at least the same benefits as Medicare 
and competed with each other and with traditional Medicare to 
produce them in the most cost-effective way. We believe that 
that would control the costs, that the costs would go up much 
less rapidly. And that would be part of bending the curve, as 
the Senator says.
    We have, however, a fail-safe mechanism in there. If the 
competition does not result in bending the curve enough, we 
would say the defined support, the Federal contribution, would 
not go up faster than the GDP grows plus 1 percent. And if it 
did, there would be additional premiums for those choosing the 
more expensive plan, but those premiums would not apply to low-
income people.
    That is the plan in a nutshell.
    Chairman Hensarling. Thank you.
    A question for you, Mr. Bowles and Senator Simpson. And, 
again, it was both an honor and a pleasure to serve on your 
commission. I again want to say that I think you have 
contributed mightily to the Nation's consciousness. And I hope 
that whatever success that this Joint Select Committee 
achieves, part of it will certainly be on your shoulders and 
your previous good work.
    Let me ask this question, having served alongside you all. 
And there was much great work that was done on the Commission. 
One of my personal reservations was that the Commission did not 
adopt the Rivlin-Ryan premium support plan. I thought the work 
particularly in Social Security--and if I have time, I want to 
go back to what you do on the 75-year solvency.
    But on Medicare, which is really a larger, long-term 
challenge, we seemed on the Commission to apply much smaller, 
short-term reforms. You did put the 1-percent-plus-GDP cap, if 
I recall right, on total health-care spending, with a trigger 
of expedited procedures, if I recall right, to go to both 
bodies to fix the problem, but it wasn't a hard trigger.
    So, two questions. Do you believe in the defined support 
system policy that was just articulated by Senator Domenici and 
Dr. Rivlin? And if you do, why didn't we adopt something like 
that in Simpson-Bowles? I assume either, one, you didn't agree 
with the policy or, two, you didn't have the votes. Or maybe 
there is a third option.
    Mr. Bowles. Probably both.
    What we tried to do was to look at it on a realistic basis. 
If you look at the cost of Medicare and Medicaid alone today, 
it is about 6 percent of GDP, and it is growing like a weed. 
And that excludes what it takes to do--the $267 billion to do 
the doc fix, over $76 billion to repeal the CLASS Act. So it 
really is a big portion of our cost. It is, as, again, was said 
earlier, it is also, I believe, our biggest challenge from a 
fiscal viewpoint.
    As we looked at the Affordable Health Care Act which was 
recently passed, it was the contention of the Democrats on our 
commission that the cuts that were made to Medicare in the 
Affordable Health Care Act, along with the pilot programs that 
were set up, would reduce the rate of growth of health care to 
GDP plus 1.
    Chairman Hensarling. If I could interrupt, most of those 
cuts on the provider side, if I recall.
    Mr. Bowles. That is correct. That is correct.
    We didn't think that would happen; we didn't think those 
cuts were enough. So we did about $500 billion of additional 
cuts over and above that, with the hope that those cuts would 
slow the rate of growth of health care to GDP plus 1.
    But assuming that that didn't happen, you know, to us, 
there was no choice but to get the rate of growth to health 
care to that level, and we said there were certain options that 
would have to be considered at that point in time. And those 
options did include a premium support plan, it did include a 
robust public option, it did include even a single- or an all-
payer plan.
    Chairman Hensarling. I see my time is about to run out 
here. Let me quickly cover two other subjects.
    With respect to both of your plans on raising revenue, I do 
note that, as part of that, marginal rates are brought down in 
both plans. Is that correct? The witnesses are saying ``yes.''
    I have less than a minute remaining in my time. Also, I was 
looking for certain common elements of your plans, one of which 
is global chained CPI throughout the entirety of government 
programs. And in the very short time that we have left, maybe I 
could get a 30-second answer out of each of you, why you 
thought that was a critical part of the solution.
    Senator Domenici--okay, well, Dr. Rivlin, a brief answer on 
chained CPI?
    Dr. Rivlin. Yes, it is a technical change that economists 
have, for quite a while, decided was a better way, a more 
accurate way of measuring the cost of living for this purpose. 
And it would affect all government programs, including the Tax 
Code.
    Chairman Hensarling. So the COLA would still be there; it 
simply would rise at a different rate.
    Dr. Rivlin. Oh, absolutely. It is just a technical change 
in how you calculate the COLA and the index that is used for 
other programs with COLAs, including the Tax Code, which 
indexes the brackets.
    Chairman Hensarling. Senator Simpson, I am technically out 
of time, but could I get a quick answer on chained CPI?
    Mr. Simpson. Everything we looked at, people had looked at 
it. It is better. Although there are suggestions for something 
else, CPI-I, but that is experimental. This one looks like 
everyone would adopt it. And if we could do it government-wide, 
it saves billions.
    Chairman Hensarling. I thank you, Senator.
    The co-chair will now yield to his co-chair, Senator 
Murray, for 10 minutes.
    Co-Chair Murray. Thank you very much.
    And, again, thank you to all of you for your wise counsel 
on a very serious challenge.
    Let me just start, it seems both of your prospective 
proposals would achieve deficit reduction of at least $4 
trillion over the next 10 years through the use of a balanced-
approach framework that includes reductions in spending and 
increases in revenue.
    So let me just ask all of you, maybe by show of hands, do 
all of you believe that to get a balanced program that 
addresses the fiscal crisis, do we need both spending cuts, 
including entitlement reform, and revenue increases? Show of 
hands?
    Mr. Simpson. No question, yes.
    Co-Chair Murray. Okay. Well, let me start, then, with 
Senator Simpson and Ms. Rivlin. Maybe both of you can answer 
for your sides. Tell us why a balanced approach that includes 
both reductions in spending and increases in revenue was 
proposed by your committees.
    Mr. Simpson. Well, we know you can't cut-spending your way 
out of this, you can't tax your way out of it. If you get into 
some of the rates that would happen if you are doing taxes or 
whatever it is, it can't be.
    And we tire of the phrase ``tax increase'' when we are 
digging around in a $1.1 trillion stack of stuff called tax 
expenditures, which really affect about 5 percent of the 
American people. The little guy has never heard of half of 
them. And we said, let's take those, let's take those. And when 
you take one of those out, to call that a tax increase is a 
terminological inexactitude. It would be called a lie, in other 
words. And that is where that is. This is a fake, to say that 
you get rid of a tax expenditure and it is a tax increase.
    So we said we are not going to get into that business of 
tax increase so that Grover won't have a stroke over in his 
shop; we are just going to go around Grover and let Grover 
rant. Because I will tell you one thing, if he and the AARP--if 
we are in thrall to those two groups, we haven't got a prayer, 
and neither have you.
    Co-Chair Murray. Dr. Rivlin?
    Dr. Rivlin. I agree, we were attacking expenditures in the 
Tax Code, and they are almost identical with expenditures that 
are called spending.
    There is another reason, however, why you need a balanced 
approach, and that, I think, is the demographics. This 
government is going to have to absorb a doubling of the number 
of people over 65 in the next couple of decades. That is an 
awful lot of people. That isn't changing the role of 
government; that is absorbing a lot more people, which we can't 
do unless we have some more revenue.
    We must bend the curve on health care. We must fix Social 
Security. But we can't do it in such a drastic way that we can 
absorb all of those people without some more revenue.
    Co-Chair Murray. Okay.
    Mr. Domenici. Madam Chairman?
    Co-Chair Murray. Yes, Senator Domenici?
    Mr. Domenici. Might I just say, I think you all know, at 
least you, Madam Chairman, and a couple of other Senators there 
know me and have known me for a long time. And I didn't come on 
this committee trying to get anything--I didn't have any 
preconceived percentages that we used to work on. I said, let's 
start over.
    And the truth of the matter is, even when you fix Medicare 
in any reasonable way and bend the curve so that over 20 years 
you really get some savings, the deficit is still too big 
unless you decide to fill that gap with something. In other 
words, you don't have a viable budget versus the economy 
situation. So you have to look to the only thing that is left, 
because you have done the others. And we did it that way.
    Co-Chair Murray. I very much appreciate that response.
    And, Mr. Bowles, let me ask you, in the guiding principles 
and values that were established by your commission to guide in 
the development of your recommendations, you state that 
``growth is essential to restoring fiscal strength and balance, 
and deficit reduction must not disrupt the fragile economic 
recovery.''
    CBO and many economists agree that the rate of economic 
growth in the recovery projected for the remainder of this year 
and through 2012 was considerably stronger when your commission 
put out its recommendation than it is today.
    So I wanted to ask you if you believe, first of all, that 
the Commission was successful in adhering to those economic 
principles, but also whether, given the weaker projections for 
today, whether we should be doing more now for economic growth 
and reducing unemployment.
    Mr. Bowles. First of all, our commission, it was the number 
one founding principle in our commission that we didn't want to 
do anything that we considered to be overtly stupid, and we 
felt it would be overtly stupid to do anything to disrupt what 
is clearly a very fragile economy and in fact a very fragile 
economic recovery.
    Therefore, if you look at the cuts that we made in 2011 and 
2012, you will see that those cuts are quite small. However, we 
thought it was very important for us to get spending down, and 
so we did make significant cuts in spending in 2013, and those 
spending cuts do get us back to 2008 levels or pre-crisis 
levels of spending.
    When we came forward with that provision, lots of people 
thought, you know, that we were being too conservative. They 
said the recovery is real, that if you look at things like back 
in December, as you asked about, there was an increase in 
factory production, existing home sales were going up, retail 
sales were going up, it looked like banks were starting to lend 
to small businesses, unemployment was starting to come down, 
and investor sentiment was strong, and therefore people said at 
that point in time the recovery is real.
    We, on the other hand, felt while the recovery may be real, 
it was very, very fragile, and the reason we thought it was 
fragile, and I think that has been proven to be right over 
time, is that we were very concerned about demand. Demand comes 
from three basic sources. You know, the consumer is still two-
thirds of GDP, and in our cases we looked at consumer debt or 
household debt, it was still about 120 percent of household 
income, it was about $13 trillion outstanding. Over half of it 
was at floating rates. And if you think that a rise in food 
prices and gas prices took a bite out of consumer demand, you 
wait until interest rates go up. So we didn't see the consumer 
who had suffered a decline in their home value and a loss of 
income driving the economic recovery.
    Second leg of growth would come from business. It is a fact 
small businesses can't grow and can't create jobs without 
capital, and banks simply weren't lending to small businesses, 
and so we didn't see that the small business community would be 
able to lead us out of the recovery, and with big businesses 
who had plenty of capital, their capital was basically on 
strike because they didn't have confidence in the direction the 
country was going or didn't know which direction the country 
was going in, and lastly, it is hard to see business really 
lead us out of a recovery when the construction industry is 
really on its backside.
    The third level of economic growth would come from 
government. We didn't foresee an additional big stimulus 
package coming out of Washington to add growth to the economy, 
and if you look at what State and local governments were doing, 
they were actually cutting spending and laying people off, 
trying to balance their budgets. So we didn't see where the 
growth would come to drive the economic recovery.
    Myself, I believe we are in a structural contraction which 
will lead to a prolonged period of relatively slow growth and 
relatively high unemployment.
    Co-Chair Murray. Dr. Rivlin, your plan also addressed the 
concern of accelerating the recovery and phasing in some kind 
of deficit reduction, and I think you also were worried about 
the demand. Can you talk to us about what you did in your 
proposal?
    Dr. Rivlin. Yes, we were very worried about inadequate 
demand, and so we not only phased in the deficit reduction 
slowly, but we called for a 1-year, both sides, employer and 
employee, payroll tax holiday on the grounds that that was 
needed to stimulate demand upfront before we could safely phase 
into the deficit reduction that we were calling for. That was 
at a time when the economy was somewhat stronger; it seems to 
us even more necessary now.
    Co-Chair Murray. Did you have anything besides the payroll 
tax to stimulate jobs in your plan?
    Dr. Rivlin. No. We put that in as a kind of symbol of how 
concerned we were, a full year payroll tax holiday for employer 
and employee is, I think, $650 billion. That is a lot. Now, you 
could do it different ways. But we put it in to symbolize the 
fact that we were really worried about inadequate demand.
    Mr. Domenici. Madam Chairman, I might comment on that. 
Frankly, I was very surprised in looking at the group of people 
that were on this debt reduction group, when it came to this 
issue, they were as worried as on any issue I had seen because 
they were really fearful that the economy was not going to 
recover. Frankly, we don't know what will make it recover, but 
Alice has appropriately told you what came about, how we came 
about what we did, and it is a lot of money. I guess some of us 
said that it might have been a much better thing to have done 2 
years ago than whatever we tried to bring jobs. This might be a 
better way than anything we did, so we said let's suggest it.
    Co-Chair Murray. Okay, appreciate that very much. My time 
has expired, so thank you very much.
    Chairman Hensarling. The co-chair now recognizes Senator 
Kyl from Arizona.
    Senator Kyl. Thank you. First to Senator Domenici and 
Senator Simpson, it is great to see you both again, and to all 
four panelists, thank you for the, what, thousands of hours 
that you have put in on these subjects, and it has been helpful 
to everyone. Senator Simpson, you never disappoint. This is a 
serious subject but a little levity sometimes can help, and I 
appreciate that.
    You talked about eliminating so-called tax expenditures, 
and I just have one quick question for you, a comment on taxes, 
and then I would like to talk about entitlement reform. If you 
eliminated the so-called tax expenditures, the biggest four of 
which on the personal side are deductions for medical expenses, 
charitable contributions, mortgage interest payments, and 
payments of State and local taxes, and you don't reduce 
marginal tax rates commensurately, the roughly one-third of 
Americans who itemize would have a higher effective tax burden, 
would they not? In other words, they would pay more in income 
taxes?
    Mr. Simpson. Well, we, in getting rid of the 1 trillion 100 
billion suggested that the $100 billion would go toward 
reduction of the debt and the rest of it would come out, and we 
would give the people of America what they have been asking 
for, broaden the base, lower the rates, get spending out of the 
code, and we said we will give three rates: 0 to 70 grand you 
pay 8 percent, 70 grand to 210 you pay 14, and everything over 
210 you pay 23, and take the corporate rate to 26 from 36. But 
if you want to put something back, go ahead. The issue being if 
you want it, pay for it. So then you could go to rates of 12 
and 18 or whatever you want to do. We said give--on home 
mortgage interest deduction, give them a 12\1/2\ percent 
nonrefundable tax credit, that helps the little guy. If you 
want to do charitable contributions, give them a 12\1/2\ 
percent nonrefundable tax credit. We realize those things, 
municipal bonds. But at some point you just say, look, you were 
told to bring home the bacon, the lobbyists got you what you 
wanted, and now it is over, the fun and games is over.
    Senator Kyl. So do I understand of the $1.1 trillion, $1 
trillion of that would go for rate reduction?
    Mr. Simpson. That is correct.
    Senator Kyl. And only $100 billion for debt reduction?
    Mr. Simpson. That is correct, Jon, and it is good to see 
you, we served together, but let me just say, if you want to 
put something back, and they are wonderful things, earned 
income tax credit, you can get the violin out if you want to 
talk about what you are doing.
    Senator Kyl. Let me not take the time to do all that.
    Mr. Simpson. No, I don't want to do that.
    Senator Kyl. Let me just make one observation, and then I 
do want to get to the entitlement spending. Both the Fiscal 
Commission and the Bipartisan Policy Center have suggested that 
one of the options here is to tax capital gains and dividends 
at ordinary income tax rates.
    Now, you started the testimony by noting that you wouldn't 
want to do anything to disrupt a fragile economic recovery, 
sort of along the line of first do no harm, and my own 
observation is I think you could do great harm by effectively 
doubling the capital gains and dividends taxes because those 
represent areas of capital formation and investment in our 
economy.
    Let me just make a quick observation here. The government 
receives capital gains revenues when taxpayers sell appreciated 
assets. The technical terms are called realizations. Now, 
Congress tried taxing capital gains at the same rate as 
ordinary income before--this was back in 1986--and the 
resulting capital gains revenues were dismal. In fact, they 
shrunk and remained depressed for a decade until Congress 
lowered the capital gains rate in 1997. Higher capital gains 
taxes mean fewer realizations, a higher cost of capital, less 
activity in the capital markets, and less economic growth.
    The health care bill that was passed last year already 
increases capital gains and dividends rates by another 3.8 
percent, and that means that the very lowest capital gains rate 
under your suggestion would be 26.8 percent, the highest would 
be 32.8. In other words, more than double the existing rate, 
and even the Joint Committee on Taxation would say that a rate 
that high will actually lose, not gain, revenue, and that 
doesn't even account for the negative impact on economic 
growth.
    Other economists, ones who testified before our Finance 
Committee, said letting the top capital gains and dividends 
rate drift up to 20 percent will erase the theoretical revenue 
gain from increasing the tax rate and will lower both economic 
growth and wages. If the rate is pushed even higher, more 
revenue and GDP will be lost, and wages will be even lower.
    So I would just ask you all, as we continue to visit about 
these things, to think about this. Your views are important to 
the committee, but in this one respect I think it could be very 
counterproductive by lowering economic growth, not really 
raising revenues, and it would make our deficit problem worse.
    Now, let me turn to entitlements here because, Dr. Rivlin, 
I think you said something very important in response to 
Representative Hensarling's questions, and I want to make sure 
that I have this right. First of all, I think it would be 
useful for you to explain the benefits of a defined support or 
a premium support such as you recommend. If you could do that 
generally. But also correct me if I am wrong, but I understood 
you to describe the plan laid out in your submitted testimony, 
which is a little different than the original Domenici-Rivlin 
in that at least there are two attributes. First of all, you 
would actually--do you actually set the contribution, the 
Federal contribution level first by the second lowest bid, 
which would include fee for service but have the fail-safe, as 
you described it, that in no event would it go up more than GDP 
plus 1 with a sort of means tested premium support in the event 
that it did so? If that is not accurate, please tell me how I 
am wrong.
    Dr. Rivlin. Senator, you have it exactly right. We have 
improved this plan, I think, over our original one. It is now 
more like the bipartisan plan in the Breaux-Thomas proposal of 
the late 1990s, and one of the complaints that we got about the 
way we did it originally was it didn't reflect the actual costs 
of health care. When you do it by a bidding process, then it 
does reflect the actual cost.
    Senator Kyl. And also, as you are describing the benefits 
of this, talk about how you select the second lowest bid 
because I think that is a very clever way to do this.
    Dr. Rivlin. Well, that is arguable. There are different 
ways of doing it, but we thought----
    Senator Kyl. I thought it was.
    Dr. Rivlin [continuing]. Selecting the second lowest bid 
gave--it wasn't the lowest, which might well be flukishly low 
for some reason, but people then who wanted to go to the even 
lower bid, the one that wasn't selected could do so and could 
get some money back.
    Senator Kyl. They would pocket the difference between the 
second bid and the one----
    Dr. Rivlin. Right.
    Senator Kyl. And if they wanted to be no dollar out of 
pocket, they would take the second lowest bid plans.
    Dr. Rivlin. Right.
    Senator Kyl. And of course anybody could offer plans at 
that level, and if somebody offered a plan that was more 
expensive, perhaps it had a different set of benefits or 
whatever, then they could pay for it, but the Federal premium 
support would only be at that second lowest bid.
    Dr. Rivlin. That is right. So it gives you a way of making 
the competition real, and we believe that would bring the costs 
down.
    Senator Kyl. I agree with that. Now let me go back to my 
first question there. Discuss the benefits of that premium 
support concept generally because I think it is not necessarily 
well understood. And then the final question I will ask is, 
that is not all that you would recommend. You also recommend--
and this is really a question for all of you, but additional 
changes to the existing system that we have in order to 
potentially reduce expenditures, things like combining the part 
A and part B, increasing premiums under certain circumstances. 
I have forgotten whether you get into the co-pay issue or not. 
But could you also discuss whether some of those things are 
useful to do even if we do the premium support, but in any 
event, certainly if we don't do it.
    Dr. Rivlin. Yes, and I think also the things that Erskine 
Bowles mentioned, that the pilot programs and attempts to find 
better ways of delivering care and government support and 
private support for innovations and testing those things and 
putting them out in the public domain, that is all a very good 
thing to do, and we think it will pay off in the end, and it is 
not incompatible with our defined support plan because once you 
have those innovations out there in the public domain, the 
private sector is going to pick them up, Medicare will use 
them, things will get better.
    Senator Kyl. Hopefully reduce costs.
    Mr. Domenici. Mr. Chairman, Madam Chairman, might I just 
follow up with Senator Kyl with one observation? On this one 
that you are speaking of on Medicare, the first thing that we 
did was to note the objection to a new system, and it was 
generally right upfront that you are abolishing Medicare, and 
so this new plan starts with the premise, we will have both 
programs, and you can choose, and that put us on a completely 
different path with our members than before, and it is very 
different than anything you all have considered, excuse me, you 
all in the House have considered heretofore when you took this 
subject up.
    Senator Kyl. An important observation. Thank you.
    Mr. Bowles. Actually, I didn't say it, Senator, but in our 
plan we did try to address this issue. Our belief was the 
current benefits structure encourages overuse, and there are 
currently a hodgepodge of different co-pays and deductibles and 
premiums. We wanted more cost sharing in our plan, we wanted 
people to have some skin in the game, we wanted to get rid of 
first dollar coverage for that reason. So we went to one 
deductible on part A and part B of $550. We had a 20 percent 
payment up to $5,500, and then a 5 percent co-pay up to $75,000 
and capped out at that level. We also on Medigap, we had no 
Medigap would be available for the first 500 and then 50/50 up 
to $5,000.
    Senator Kyl. All of those I think are very useful 
suggestions, and I appreciate them all. Thank you.
    Chairman Hensarling. The time of the gentleman has expired. 
The co-chair now recognizes the gentleman from California, 
Congressman Becerra.
    Representative Becerra. Thank you, Mr. Chairman. To all of 
you, thank you very much for your service to this country and 
for the work you have done to give us some templates that we 
can use to try to resolve this issue for not just the Congress 
but for our country.
    I enjoy always hearing from the four of you because you 
have shown us that you can be big, you can be bold, and you can 
be balanced and still try to move the country forward, so I 
thank you for that, and as I said to both Alan and Erskine on 
many occasions, I thank you so much for attacking those sacred 
cows that too often get in the way of Congress being able to 
deal with those things that are most important. I honestly 
think, and I served on that Commission with you, as I said 
before, I thought you put all the elements in place. I would 
have put the mixture of those elements differently, but I 
compliment you today, as I did back then, and I applaud you for 
what you did in putting together the template of what could be 
a solution for the country.
    I think I heard you all say this, but I want to make sure 
about this. While we are still suffering through these 
difficult economic times and back when we were going through 
this with the Commission, and Director Rivlin, I know that you 
and Senator Domenici were also going through this as well when 
you were coming up with your plan, times were tough. Well, they 
are still tough, and I suspect all of us back when we were 
going through the work of these two Commissions thought that 
the country, the economy was doing far better.
    Is it still your premise that we should really concentrate 
on getting the economy back on track, getting Americans back to 
work before we go too heavily into trying to find these savings 
by making cuts in some of these important investments that we 
have? And I will open it up to anyone to answer. Director?
    Dr. Rivlin. It is a timing question, Mr. Becerra. We 
believe that drastic cuts in spending right now would be 
damaging to the economy, as would tax increases right now. We 
need to let the recovery happen and indeed stimulate it with 
proposals that we have been talking about. But that doesn't 
mean putting off the deficit reduction. One of the best things 
we could do for the growth of the economy right now is for this 
committee to legislate long-run reduction in the deficit on the 
entitlement and tax side right now. We can't wait until after 
2013 or some other time to do that. The markets and the public 
have got to see that it is going to happen, that we are 
serious, and that it is in law. Then it doesn't have to take 
effect right away, but it has got to be in the law.
    Representative Becerra. So let it play itself through, get 
it done, let it play itself out, you have time for it to take 
effect long term as you see the economy begin to recover?
    Dr. Rivlin. Right. But don't wait to legislate it.
    Representative Becerra. Got it, got it.
    May I ask a question regarding revenues? You all tackled 
the issue of revenues, you did it in somewhat different ways, 
but for the most part you did something that I thought was very 
important. You tried to also show the public that while we 
would increase real revenues, we would ultimately try to reduce 
the rates and give people a fair taxation system, and so that 
while we were still able to generate revenues, which we need, 
you are able also to tell the public that they are going to 
have a system that works better for them, and so that they 
could understand the simplicity and the fairness of it.
    In both plans I believe, and we have had a little 
discussion on this, you equalized the taxation for capital 
gains and dividends to ordinary income or, in layman's terms, 
an asset, an investment in stocks or bonds would now be taxed 
at the same rate that the income earned by a hard working 
American would be taxed at, so they would be treated equally. 
You also found ways to reduce the rates overall for all income 
groups, and you went after what I know in the Bowles-Simpson 
Commission became known as tax earmarks, those tax expenditures 
which I believe, Senator Simpson, you mentioned totaled over a 
trillion dollars. And so you came up with a mix. Again, you 
tackled some sacred cows, and you came up with a mix.
    Is it still your sense that that type of a mix can work for 
this committee? Open it up to anyone.
    Mr. Domenici. Sir, I will say absolutely, and I would say 
to my friend Senator Kyl when he talks about capital gains, if 
you look at my record, I have voted in favor of capital gains 
for my 36 years in the Senate, but I didn't have a chance to 
lower the rates like we are lowering them at the same time that 
you were looking at capital gains. In this case that is what 
happened. We lowered the rates.
    Now, I heard from the best experts this country could put 
before me when I was chairing that the best way to effect 
growth in this country is to lower the rates on all people. 
That was the best instrument of growth. They didn't say except 
for capital gains. They said it is the best instrument for 
growth, and we lowered it all substantially, so we put back 
into the code the instruments of growth which is the lowering 
of the rates on middle America and all Americans, which we did 
in ours and they did in theirs. Theirs is a little stronger in 
terms of, as Al explained it, they have come down lower so you 
can put back some things.
    I would tell you, we also included in this, so you don't 
forget, we put in the medical expenses, which is the largest 
tax expenditure. It is bigger than homeowner interest rates. We 
phased that out over a long term. That is a very difficult one, 
but we did it in ours, and you all should know that is part of 
the reason we got the rates we got.
    Representative Becerra. And, Erskine, I think you called 
the tax expenditures backdoor spending through the Tax Code?
    Mr. Bowles. It is, Congressman. It is just spending by 
another name. I was flabbergasted, I was appalled to see that, 
you know, having listened to all the talk about earmarks all 
these years which are in the appropriations bills, there are 
about $16 billion worth of annual earmarks a year. There are 
$1.1 trillion worth of annual earmarks in the Tax Code. And it 
is just spending by another name. It is somebody's social 
policy. And if you were to eliminate them and use 92 percent of 
the proceeds to reduce rates and only 8 percent of the proceeds 
to reduce the deficit, you could reduce the deficit by about 
$100 billion a year, so a total over a 10-year window of about 
a trillion dollars, and you could take rates to 8 percent up to 
$70,000, 14 percent up to $210,000, and have a maximum rate of 
23 percent. You could take the corporate rate to 26 percent, 
and you could pay for a territorial system so that $1 trillion 
that is captured overseas could be brought back to this country 
to create jobs over here. I believe that would create dynamic 
growth in this country and produce revenues far beyond what we 
have forecast. So I am very excited about broadening the base 
and simplifying the code. I think it makes a lot of difference.
    Representative Becerra. And I would love to focus on a 
couple more areas of spending. I know that when we talk about 
spending you also were willing to tackle this issue of the 
discretionary side of the budget, the kind of spending we 
typically talk about, but most people don't recognize that 65 
percent of all the spending increases that occurred over the 10 
years, the last 10 years came out of just one department, the 
Department of Defense, mostly because of the war, but because 
of the growth in some of our military projects and contracts 
and so forth. I know that you tried to tackle that some and I 
appreciate the work that you did there.
    With the limited amount of time that I have, I would like 
to touch on health care, and I appreciate what each of the 
Commissions tried to do on health care, but let me just pose 
one question. Perhaps you can help us with this. We could do 
any number of things to try to reduce the cost of Medicare and 
Medicaid for the American public, but at the end of the day if 
we do nothing to try to help lower the cost of health care 
overall, not just within the public sector, within Medicare/
Medicaid, we will simply have shifted the expense of health 
care in Medicare/Medicaid to those who use health care through 
Medicare/Medicaid, to our seniors and our disabled because the 
reality is that today the cost of health care under Medicare is 
growing slower than the cost of health care in the private 
insurance market. We went through that in the Bowles-Simpson 
Commission, how it is really strange, we are talking about the 
crisis in health care. The reality is if you were to get rid of 
Medicare and send seniors over to the private sector insurance 
market, they would actually end up paying more because the cost 
of private insurance is growing at a faster clip than is 
Medicare/Medicaid. So the issue is, how do we corral the cost 
of health care which it could hit Medicare/Medicaid, so that 
way we don't end up just shifting costs from the people, the 
taxpayers, to the actual beneficiaries, in this case our 
seniors who are now retired.
    So if you can give that some thought, that would be very 
instructive. I know that the health reform of last year meant 
to do that, to try to help corral the cost in the private 
sector, but if we don't do something about overall health care 
costs, simply telling seniors that they will end up paying more 
in Medicare doesn't help with our health care costs.
    Thank you for your service to this country and your time.
    Chairman Hensarling. The time of the gentleman has expired. 
The co-chair now recognizes Congressman Upton of Michigan.
    Mr. Upton. Well, thank you, Mr. Chairman, and I certainly 
want to agree with each of you that these deficits are 
unsustainable. I appreciate your candor, your service, your 
hard work. Believe me, we know a little bit about your work 
because we together have spent hundreds of hours as well over 
the last number of weeks, and you underscore my respect for 
each of you as truly great Americans.
    As you may know, my home State of Michigan, Dave Camp's as 
well, we have had 34 consecutive months of double digit 
unemployment, and as I talk to people back home, as I was again 
this past weekend, people know we are in a rut. Senator 
Simpson, they know exactly what you are talking about. And 
they, in fact, are relying on us to try and get our car out of 
the ditch and back in first gear.
    I put a chart, I can't see it very well up here, but I 
think you have a chart I think in front of you that scores the 
President's health care plan from 2014 to 2023, and that 10-
year outlay plan shows that spending, the effects on the 
Federal deficit will be almost $2 trillion in additional 
spending over the next 10 years.
    [The chart appears in the appendix on p. 512.]
    Representative Upton. And each of you noted in your various 
proposals that the Federal budget is on this unsustainable 
path, and you identified health care as one of the most 
important items that this committee and the Nation should be 
focusing on.
    So as you see from this chart, that the exchange subsidies 
are certainly the primary driver of this dramatic expansion of 
Medicaid. CMS actually certified that because of the 
President's proposal, nearly 25 million more Americans will be 
on Medicaid after 2014 because of that expansion, which means 
that more than one in four Americans will be, in fact, a 
Medicaid beneficiary.
    So based on that and the statements that you have made 
about the budget crisis, do you believe that we should revisit 
the expansion of the Medicaid program in the President's 
proposal? Erskine? Sorry that you start on that end.
    Mr. Bowles. No, no, I am very happy to answer any question 
that you ask. You won't smell any fear on us out here.
    Mr. Simpson. Go right ahead.
    Mr. Bowles. We had great questions that if the affordable 
health care plan could actually slow the rate of growth of 
health care to GDP plus 1. Because we had those questions, we 
did believe it would solve the problem of providing more people 
health care, but we didn't think it solved the problem of how 
to control the cost of health care, and therefore we made the 
$500 billion worth of additional cuts to both Medicare and 
Medicaid and certain other Federal health care programs in 
order to--and hoping that that would slow the rate of growth. 
If it didn't slow the rate of growth, then what we said is 
there has got to be an overall cap on all of these areas of 
spending, of Federal health care spending, and you are going to 
have to look at some options like a premium support plan, like 
the robust public option, like a single payer plan.
    Representative Upton. Alice? Or, I am sorry, Alan.
    Mr. Simpson. We just knew that whatever you call it, if you 
want to use the negatives or call it ObamaCare or any kind of 
care you want to, it won't work. It can't work because all you 
have to do is use common sense. You have this imploding of 
people, you have diabetes, you have one person in America 
weighs more than the other two, you have got guys who choose to 
do tobacco, who choose to do booze, who choose to do designer 
drugs, and all of them will be taken care of. You have got 
preexisting conditions in 3-year-olds. What happens through 
their 60 years or 50 years of life? All you have to do is 
forget the charts and know that if you torture statistics long 
enough, they will eventually confess, and know that this 
country cannot exist on any kind of situation where a guy who 
could buy this building gets a $150,000 heart operation and 
doesn't even get a bill. Now, that is nuts, and that is where 
we are in America. There is no affluence testing, you have got 
to raise co-pays, you have got to knock down providers, you 
have got to deal with physicians, you have got to have 
hospitals keep one set of books instead of two. That would be a 
start.
    Representative Upton. Alan, what did you do about Medicaid? 
Because originally you all had, as I understand it, you were 
going to convert it into a block grant for the States, and it 
is my understanding that you dropped that proposal; is that 
right?
    Mr. Bowles. We were never going to convert it into a block 
grant for the States. One of the things that--we felt that was 
too big of a shift, too unproven of a theory. What we did 
advocate is testing it in 10 States. It is on the theory that 
one size doesn't fit all, that Governors can cover more people 
with less cost if they have control of the funds. So we said 
let's test it in 10 States. If it does prove to be something 
that does lower the cost of health care and still provides 
coverage to people who need it, then we could support it, but 
you ought to test it first. I think that is what you would do 
in the business world, I think that is what you would do in 
most places.
    It is now being tested in Rhode Island. It is working very 
well. I understand Washington State is actually asking if they 
can test it. So I do think it is one of the things that will 
prove out over time.
    Representative Upton. So beyond those tests did you ask for 
any other reforms on the Medicaid side?
    Mr. Bowles. Yes, we did.
    Representative Upton. And they were?
    Mr. Bowles. As an example, having run the public hospital 
in North Carolina for the last 5 years, you know, you can see 
the gaming that goes on in the Medicaid program by the 
payments, since it is a shared cost program, that is 
approximately 50/50 between the States and the Federal 
Government, you know, the docs would up the amount they would 
charge in order to cover higher fees charged by the State. They 
would both come out even, but the taxpayers would end up with 
about a $50 billion bill for that. So we cut out that kind of 
gaming in the State Medicaid programs.
    Representative Upton. Now, Alice, one of the proposals that 
you all recognized on the Medicaid side was this program called 
the per capita cap, which for those in the audience would 
actually, each State would receive an allotment determined by 
the number of folks in the specific categories for Medicaid 
based on the State population number for those numbers, and 
then that would be increased each year by GDP plus 1 beginning, 
I want to say, in 2014, 2015. Do you--are you a part of that 
proposal? I know way back when. Are you still supporting that 
idea?
    Dr. Rivlin. We looked at a number of ways to reduce the 
rate of growth of costs in Medicaid. One was splitting the 
responsibility between the Federal Government and the States. 
Medicaid is really two programs. It is acute care, which is 
largely for children and their mothers, and it is long-term 
care, and one of the things we looked at was split the 
responsibility for those two between the Federal Government and 
the States. We thought that would help make it clearer who is 
responsible for what, and not have the matching program that 
results in a certain amount of gaming. We also wanted to get 
rid of the kind of gaming that goes on in Medicaid, as Mr. 
Bowles has suggested, and one thing we were very clear about 
was the dual eligibles, those who were eligible for both 
Medicaid and Medicare. There is some impediments to their 
getting into managed care and management of their usually 
multiple diseases, and we wanted to fix that.
    Representative Upton. And what did you do in terms of added 
State flexibility to allow the States to be able to have 
greater control over what services were eligible?
    Dr. Rivlin. That is certainly a possibility. We did not, 
frankly, come down very clearly. We offered a menu of options 
on what to do about Medicaid. I think it is the hardest 
problem, much harder than Medicare, and we thought we had a 
good plan for Medicare. We offered a menu for Medicaid.
    Representative Upton. On Medicare, both Ways and Means and 
Energy and Commerce have jurisdiction over this issue, and I 
know that as many of us have looked at this, we have felt that 
it is the toughest entitlement to try and curb the cost curve 
downwards. We have heard a little bit about A and B, putting 
them together, the deductibles, the co-pay. It is my 
understanding that both of your groups also increased the age, 
is that right, for eligibility?
    Dr. Rivlin. No, we did not. We didn't even do it for Social 
Security. But we certainly did not for Medicare.
    Mr. Bowles. We have it as one of the options out in the 10-
year window. It is not in the first 10-year window.
    Representative Upton. And when you looked at all the 
options that you considered, what was the one that was the 
first--what was the priority order that you came up with in 
terms of where you thought we--what we ought to do to reform 
Medicare?
    Mr. Bowles. We did not prioritize outside of a 10-year 
window. We said that drastic steps are going to be taken, those 
drastic steps must include looking at things like Alice and 
Paul's premium support plan, it has to look at a robust public 
option, it has to look at things like block granting Medicaid 
to the States, it has to look at things like a single payer 
plan, it has got to look at things like raising the eligibility 
age for Medicare. That is what we--those are the options we saw 
that would have to be considered if, in fact, you can't slow 
the rate of growth to GDP plus 1.
    Chairman Hensarling. Before yielding to the next panel 
member, Senator Simpson, I think I have been informed that you 
have to depart in 20 minutes, if that is----
    Mr. Simpson. Mr. Co-Chairman, I could wait a few minutes 
after that. I have to get to Dulles to catch a 5:30 flight to 
Denver so I can get out of town before they find out I have 
been here.
    Chairman Hensarling. Well, certainly Senator, we sincerely 
appreciate your participation today, and you will be excused 
from the panel whenever you need to depart.
    Mr. Simpson. Let me share with the co-chairs that Erskine 
Bowles has a remarkable thing to present to you, and if I do 
have to leave early, I would have given him my time. It is very 
important that you hear what I think is a solution for you that 
only he, in his brightness, can propose. You can do anything 
you want with it, but I think it will get you somewhere where 
we think you want to get, and Erskine, as I say, if I leave, 
whatever time you would have allowed to me, but I want to hear 
from my colleague who came to the Senate when I did, Max, and I 
will stick around to about 25 or 20 of. Thank you so much.
    Chairman Hensarling. Thank you, Senator, and the co-chair 
notes that Mr. Bowles now has your proxy.
    Mr. Simpson. Yes, he does.
    Chairman Hensarling. And the co-chair will yield to the 
gentleman from Montana, Senator Baucus.
    Senator Baucus. Thank you, Congressman Hensarling. Everyone 
wants to reform the Tax Code. I don't know anyone who doesn't. 
But it is in the eyes of the beholder, what is reform to one 
might not be reform to the other. You have mentioned the $1.1 
trillion in tax expenditures. I think it is important for 
everyone to know that only about $200 billion of those are 
itemized deductions. The rest are other tax expenditures, which 
include the employer-provided health insurance, for example, 
the retirement income provisions, R&D tax credit, there is a 
whole host of others in addition to itemized deductions. So if 
the proposal is to repeal them all in return for lower rates 
and deficit reduction, people have to realize what that means. 
A lot of people have relied on those provisions, employees have 
because that is in-kind income that is not taxed generally, as 
well as the R&D tax credit to make America strong, and 
retirement provisions so people can save for the future.
    Now, the question that comes to my mind is how quickly do 
you recommend we tackle all of that? We have a November 23rd 
deadline, and I think one of you suggested, I think it was Mr. 
Bowles, you suggested that this be delegated to maybe the tax 
writing committees so that we do tax reform with some kind of a 
kicker at the end, penalty if the committees in the Congress 
don't act, et cetera. I would like you to comment on that. I am 
also waiting for the Bowles solution at the end of this 
presentation. I hope it includes something that addresses what 
I am talking about.
    Address revenue. When you gave your presentation, Mr. 
Bowles, I might say we are all big fans of all four of you. You 
have worked so hard. When each of the four of you were 
speaking, you could hear a pin drop. You spent so much time on 
this subject and so conscientiously, so thoughtfully, people 
know that. But when you, Mr. Bowles, mentioned one of your four 
principles, as I recall, one of them was tax reform, but you 
didn't say much about revenue, how you raise revenue.
    My understanding is that the Commission suggested something 
in the neighborhood, I have forgotten exactly what it was, 
maybe a trillion dollars in new revenue to be offset with the 
spending cuts, and is that true? It is my understanding that 
you need to make permanent middle income tax cuts but not the 
upper income. You, in effect, propose raising revenue on the 
current policy basis of about $1 trillion. Does that sound 
about right?
    Mr. Bowles. Well, you know, you were on our commission and 
you attended a few of our meetings, so I think you probably 
know exactly what we did. What we did was, we did in the 
baseline extend the Bush tax cuts for everyone except the top 2 
percent.
    Senator Baucus. Right.
    Mr. Bowles. And then we reformed the Tax Code by broadening 
the base and simplifying the code and by eliminating the tax 
expenditures in our zero option plan, and in the zero option 
plan all of the tax expenditures did disappear, and 92 percent 
of the money went to reduce rates and 8 percent went to reduce 
the deficit. None of it went to additional spending.
    Senator Baucus. Right. So I think the answer to Senator 
Kyl's question would be about $100 billion for deficit 
reduction; is that correct?
    Mr. Bowles. That is about $100 billion a year 
approximately.
    Senator Baucus. How can that be enough revenue when there 
is such spending cuts recommended in your plan? I think you 
have a two-to-one ratio of revenue raised to spending cuts.
    Mr. Bowles. I think it was even more than that, Senator. I 
think it was, depending on how you counted, we had about a 
trillion dollars worth of additional revenue coming in, and we 
had about $3 billion worth of spending cuts, and we were 
working----
    Senator Baucus. $3 trillion.
    Mr. Bowles. Excuse me?
    Senator Baucus. Trillion.
    Mr. Bowles. Trillion, excuse me. And we were working 
towards that number. We were trying to get it to be no more 
than one-third revenue and two-thirds spending cuts, and we 
tried to get it to be one-quarter and three-quarters.
    Senator Baucus. Going back to my first question, do you 
recommend that we here try to enact all those, cut all those 
tax expenditures and set rates or delegate it to the tax 
writing committees?
    Mr. Bowles. Well, we do recommend that you delegate it to 
the tax writing committees and set up a framework in this 
Commission. I don't think you can possibly rewrite the tax law 
between now and November 23rd and get it scored nor do I think 
you can rewrite the entitlement legislation and get it scored 
by November 23rd, but you can provide instructions to the 
appropriate committees.
    Senator Baucus. To raise how much revenue?
    Mr. Bowles. To raise about a trillion dollars worth of 
revenues.
    Senator Baucus. Which is included in the reform with 
broadening the base and lowering the rates?
    Mr. Bowles. Yes.
    Mr. Domenici. I wonder if you would yield to me for one 
minute?
    Mr. Bowles. Sure.
    Mr. Domenici. Mr. Chairman, could I just offer a 
suggestion?
    Senator Baucus. Certainly.
    Mr. Domenici. We felt ourselves extremely confronted by the 
problem of shortness of time for such a big job of reforming 
the Tax Code. Some of us were here when Bob Packwood was the 
chairman in the Senate and that effort took place. It took much 
longer than you need, but it took 2 or 3 years, 2\1/2\, 3 years 
or more. What we did in our testimony and what we have sent to 
you in a packet is we have taken Section 404 of the law that 
created you, which is a section that we think intentionally 
gave you an extreme amount of authority and more flexibility 
than we have been talking about, and that flexibility we think 
permits you to set up a direction with specific things you 
asked the tax writing committee to do, and that they have to do 
it by a date certain, which could be 3 months from now, 4 
months.
    Senator Baucus. I appreciate that.
    Mr. Domenici. You would go to the committees. It is not 
reconciliation. It is an instruction.
    Senator Baucus. We want tax reform in the worst way, all of 
us do. We are trying to figure out the best process and the 
best way to do it.
    Second, I would like to ask about defense spending. It is 
my understanding that the Fiscal Commission recommended roughly 
$800 billion in defense cuts. When I compare that with the 
sequestration, which is about $800 billion, a little bit more, 
not much, the Budget Control Act in August cut about 350, 
referring to some accounting. Does that mean that you suggest 
another $450 billion in defense cuts?
    Mr. Bowles. We recommended about $1.7 trillion worth of 
discretionary cuts in outlays. It was about $2 trillion in 
budget authority from the President's proposed discretionary 
budget. I think he proposed, Senator Baucus, $11.7 trillion in 
discretionary spending. We proposed to cut it to $9.7 trillion, 
and the cost of the way the budget authority plays out slower 
in the form of outlays, it worked out to about $1.7 trillion. 
We said that should be split proportionally between security 
and non-security spending. We also recommended that there be a 
firewall between security and non-security spending over a 
period of time so that the future Congresses wouldn't come back 
and load it all up on the nondefense side and not on the 
defense side.
    Senator Baucus. Right, right. In the same vein I think the 
Commission recommended a cap on something called Overseas 
Contingent Operations.
    Mr. Bowles. Yes, we did.
    Senator Baucus. There is currently not a cap; is that 
right?
    Mr. Bowles. [Witness nods.]
    Senator Baucus. Isn't it true--you may not know this; you 
probably do--that the Appropriations Committee transferred $9 
billion over to Overseas Contingent Operations to escape the 
limitation?
    Mr. Bowles. I don't know about that.
    Senator Baucus. That is going on. So you therefore would 
suggest a cap to help minimize that? I think your cap is $50 
billion?
    Mr. Bowles. We were trying to keep the OCO from being a 
slush fund.
    Senator Baucus. Thank you. That is what I am getting at.
    Yes, Alan?
    Mr. Simpson. May I say that whatever you do, and that will 
be so appropriate, just do a plan. You don't have to worry 
about, you know, who is doing this or the timetable and so on 
because let me tell you why the rating agencies don't mess with 
Germany or France or Great Britain, because each of those 
countries have a plan. All these people are waiting for is a 
plan. You can decide how many teeth you want to put in the jaw, 
but just do a plan, and you will see dramatic effects around 
the world with the rating agencies.
    Senator Baucus. I agree with you very much. One question on 
the premium support, we don't have much time here. A concern 
some have is this, that with the election, to put it in rough 
terms, it would be a death spiral. That is that people 
currently on, the insurance companies will package sales of 
policies to the most healthy, so the most healthy people will 
buy these new policies, leaving the less healthy in Medicare, 
and the more that happens, the more the sicker people are in 
Medicare, so Medicare, the more it happens, Medicare costs just 
go up, up, up because the sickest are there. I am sure it is 
something you gave a lot of thought to. But some have raised 
this question. I am curious.
    Dr. Rivlin. Some have raised it, but we don't think it is 
true of our plan. We think we have avoided that possibility by 
the rules that we put in, any plan on the exchange would have 
to accept anybody, and they would be compensated on a risk-
adjusted basis. I mean, they got more for people who are older 
and sicker, therefore they have no incentive to not serve those 
people.
    Senator Baucus. Again, I just want to thank you all very 
much. You have offered a tremendous contribution to this 
country, all of you. Thank you.
    Chairman Hensarling. The time of the gentleman has expired. 
The co-chair now recognizes the gentleman from Ohio, Senator 
Portman.
    Senator Portman. Thank you, Mr. Chairman, and thank you to 
the four patriots who are sitting before us, trying to avoid 
what Erskine Bowles talked about today and in the Budget 
Committee testimony as the most predictable economic crisis our 
country has ever faced, and I appreciate the discussion today. 
We talked about a lot of the same issues that this group of 12 
has been grappling with, revenues, of course, but also 
spending.
    I would like to focus, if I could, on some of the issues 
that we have talked about, but maybe with a little different 
angle. If you wouldn't mind putting up that Bipartisan Policy 
Center chart, again, whoever is in charge of the charts, that 
is the one that Senator Domenici asked to be put up earlier. 
This is the chart that shows that health care spending as a 
percent of our GDP is set to just about double in the next 25 
years. So just take my word for it, you don't need to see it; 
no, if you guys can put that chart up, I would appreciate it 
because it is the backdrop to this question.
    Erskine Bowles said current benefits encourage 
overutilization. He talked about some of the things that could 
be done, including higher co-pays, higher premiums, talked 
about part A and part B being combined, having a single 
deductible that is a little higher. He also said that in the 
Simpson-Bowles proposal that you all recommended reducing--
there it is--reducing health care spending over a 10-year 
period by $500 billion, and I assume to Senator Simpson and Mr. 
Bowles that that refers to the GDP plus 1, that is what that 
would mean, $500 billion, given this enormous growth or, to use 
your words, unsustainable growth in health care expenses.
    And let me ask you about a couple of ways to get there that 
we haven't talked about yet. One is means testing. It seems to 
me this is one where Republicans and Democrats alike ought to 
be able to come together. I could give you some interesting 
statistics, a two-earner couple retiring today will pay about 
$119,000 in lifetime Medicare taxes and receive about $357,000 
in lifetime Medicare benefits. That is 119 in taxes for 357 in 
benefits, which goes to the advertisement that you talked 
about, Al. So that is about three bucks in benefits for every 
dollar in taxes. If you multiply this by the 77 million 
retiring baby boomers, it is not hard to see why we have an 
unsustainable program.
    Now, we can talk about this in terms of being sure, as Dr. 
Rivlin just said, that those at the lower end of the income 
scale are taken care of, but at the same time I think it is 
difficult to justify giving upper income seniors benefits that 
so far exceed what they paid into the system. Can you all just 
comment on that? We haven't talked about that specifically. How 
do you feel about means testing, particularly on the part B and 
part D premiums?
    Mr. Simpson. Well, you have to, you follow the nomenclature 
here, you never want to use the word ``mean'' in anything 
especially. You call it affluence testing, and then you get 
juice, and that is what you should do. You are going to have to 
start affluence testing some of these benefits. There is no 
possibility of people who, as I say, literally, and you know 
them in your own community, who use these systems and pay 
nothing.
    Senator Portman. How about co-pays?
    Mr. Simpson. Co-pays have to go up, and you have to 
affluence test in that. These are my personal views.
    Senator Portman. Could we see a show of hands from the 
panel because the photographers love this, how many are for 
affluence testing?
    Mr. Simpson. It would be when they ask the Republicans for 
nine bucks worth of spending and one buck worth of revenue, and 
all hands shot up like robots. You don't want to get into that.
    Senator Portman. But this worked.
    Mr. Simpson. I do favor that affluence testing, I think I 
always talked about it, Bob Kerry and I have talked about it, 
Max remembers Bob Kerry and I and Danforth and Bradley were all 
involved in that years ago when we were here. You have to 
start, and it will be called un-American, cruel, evil, breaking 
the contract, I can hear the music and the violins in the back 
already, and it won't work anymore.
    Senator Portman. Okay. Let me go to a tougher one. I don't 
know if we have----
    Dr. Rivlin. Can I chime in on that? We already do have in 
the part B premiums some----
    Senator Portman. And in part D now.
    Dr. Rivlin. And part D, and we are certainly in favor of 
increasing that.
    Senator Portman. Okay. Erskine, you talked a little bit 
about, again, some other ideas, and I am going to put you on 
the spot here, my friend, because one was raising the age. How 
do you feel about raising the eligibility age, given the 
statistics on longevity? Eligibility age on Medicare I am 
talking about.
    Mr. Bowles. We actually did not have that in our plan. As I 
have thought about it since that time, you know, under the 
Affordable Health Care Act, we provide subsidies for people who 
have really chronic illnesses and for people who have limited 
incomes to get so that they can afford health care insurance in 
the private sector, and that didn't exist before the Affordable 
Health Care Act, and that means that people 65, 66, 67 would 
still be able to get health care insurance.
    So as I think about it, I could support raising the 
eligibility age for Medicare since we have other coverage 
available through the Affordable Health Care Act.
    Senator Portman. Let's go to tax reform for a second if I 
could. All of you are talking about broadening the base, and 
Chairman Baucus, and I am sure Chairman Camp is going to 
address this, too, something they are very interested in, 
simplifying the code, being able to do so by reducing marginal 
rates and getting rid of some of the underbrush. One thing we 
haven't talked about is corporate reform. As you all know, we 
have the second highest corporate tax rate among our trading 
partners. Japan is slightly higher, and they are intending to 
take theirs down. The average of all the developed countries, 
the OECD countries, is 26 percent, we are at 35 percent, but in 
fact we are not because you have to add State taxes on to that, 
and the average is about 6 percent, which happens to be Ohio's 
rate, so you are talking about 41 percent, and we do not have a 
territorial system, we have a worldwide system, which also puts 
us at a disadvantage, we are told, by all of our companies.
    Could I see a show of hands on this, do you all support 
getting the corporate rate down to a competitive level? I would 
define that as 25, 26 percent and territoriality, does 
everybody agree with that?
    Senator Portman. Oh, Alice. I almost got Alice.
    Dr. Rivlin. Well, if you are pinning us down to a rate, I 
mean, we did take the rate down to 28 in ours.
    And, actually, we didn't do territoriality. And the reason 
was interesting. Simpson-Bowles had strong representation from 
big, multinational corporations on it. They spoke very 
eloquently for territoriality. Our business representation was 
more small business. They were not enthusiastic about 
territoriality. So we left it out.
    Mr. Bowles. Yeah, we did. We took the corporate rate to 26 
percent, and we went to a territorial system to pay for it.
    Senator Portman. Pete?
    Mr. Domenici. I support ours, the one we have been 
describing. We didn't come down as far as them, but 28 is ours.
    I think the problem we have with the public on that is it 
is discussed in isolation by the commentators. They just say we 
are lowering taxes on fat cats, corporations. But when it is 
part of an overall plan, they got a big----
    Senator Portman. Yeah, I am talking about not lowering the 
tax, so it would be revenue-neutral, so there would be no 
reduction in the taxation. In fact, you would get growth from 
that, based on all the economic analysis that we have seen, 
which would add more revenue that was not revenue from 
increasing taxes but revenue from growth and other feedback 
effects.
    Mr. Domenici. I don't disagree. I was just giving you an 
explanation that I have heard.
    Senator Portman. Yeah. I appreciate it.
    With regard to balance, because that has come up here--the 
co-chair talked about balance, you all talked about ratios and 
balances--what is the right balance? I think, first, can--you 
talked about this earlier, in terms of where you all were 
headed and where you ended up. Could you or Senator Simpson 
give us a sense of what you believe is the right balance here 
between revenue that is generated, again, through tax reform, 
but new revenue, on the one hand, and, on the other hand, 
reductions in spending? What is the right balance?
    Mr. Bowles. We thought it was no less than two-thirds, and 
we worked toward three-quarters coming from spending, as 
opposed to one-quarter or one-third coming from revenue. If you 
look at the projections for 2020, it had spending, I think, at 
about 25 percent and revenue at 19 percent. And we didn't want 
to see revenue go above 21 percent. And, obviously, we wanted 
to see if we could drive spending down to where revenue was so 
we could balance the budget at some point in time.
    Senator Portman. Yeah. Well, that is interesting, because 
you are right, you know, we are now at about a historical 
average of about 18.4 percent on revenue. And we are lower now 
with the recession, but even under CBO's statistics showing 
that the tax cuts would all continue, we get back up to that 18 
percent in the next several years.
    One final--well, I see my time has expired. Listen, again, 
I want to thank you all for your help today and the help you 
have given us up to this point, all of you who have made 
contributions to our efforts, both individually and as part of 
your groups. And we are going to need your help going forward. 
Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The co-chair now recognizes the gentleman from South 
Carolina, Congressman Clyburn.
    Representative Clyburn. Thank you very much, Mr. Chairman.
    Let me add my voice of thank-yous to all four of our 
panelists here today, and thank them so much for their service.
    I want to start with a statement. I have asked--and it has 
been put up--for a chart to be put up here, looking at a bar 
graph that I suspect a lot of us have seen in the last week or 
so and we talked about when Dr. Elmendorf was before this 
committee. It shows the widening wealth gap that is existing 
within our country today, and it covers basically the last 30 
years.
    Now, we have 3,143 counties in the United States. Of those 
3,143 counties, 474 of them, 15 percent of those counties, more 
than 20 percent of their citizens have been living beneath the 
poverty level for the last 30 years.
    And it is kind of interesting because I didn't think about 
this through the weekend because, about several months ago, I 
joined with Congresswoman Emerson on trying to focus on these 
counties and trying to direct resources to these counties. Back 
when we did the American Recovery and Reinvestment Act, the 
stimulus bill, in the rural development section of that bill we 
were successful in getting that bill to focus on these counties 
by directing the expenditure of at least 10 percent of those 
funds into those counties where 20 percent or more have been 
beneath the poverty level for the last 30 years. So when this 
report came out from CBO a couple weeks ago, it focused my 
attention once again to those communities.
    Now, when I first came on this panel, I said that I wanted 
to focus on the human side of this deficit. So what I would 
like to ask today is whether or not it is feasible to do $1.5 
trillion reduction in deficit by cuts only. What will that do 
to that bottom 20 percent that has seen only 18 percent growth 
in their income over the last 30 years and those communities 
where 20 percent or more of their population have been beneath 
the poverty level for the last 30 years? What would it do to 
those communities and those people if we were to reduce this 
deficit only by cuts that have been proposed?
    I would like to hear from all four of you on that.
    Mr. Bowles. Yeah, I am delighted to go first on that.
    As you know, Mr. Clyburn, if you go east of I-90 and you 
are in North Carolina, we have more counties that fall into 
that category than any other place in the Union. If that part 
of the North Carolina was a State by itself, it would be the 
poorest state in the Union. So, as you know, I had many of our 
universities, from Fayetteville State to Elizabeth City State, 
that operated and served the people in those communities.
    I think if you think about what you have already done, if 
you look at the continuing resolution, you took about $400 
billion of cuts through the continuing resolution. And then if 
you think about--I always think about what you all are working 
on now with the Budget Control Act in two parts, and the first 
part was $900 billion in cuts. So you had another $900 billion 
in cuts that have already been done.
    So you have done about $1.3 trillion worth of cuts already 
before you guys start on what you are doing.
    Representative Clyburn. Right.
    Mr. Bowles. I have always thought it has to be some 
combination of revenue and cuts in order to get to the $4 
trillion number that we focused on. I do think it is important 
for all of you to think about the fact that these deficits are 
just eating the budget alive. And they don't leave any money 
left over to do the kind of economic development work in these 
poor counties that you want to see done if these deficits 
continue to grow and interest on the deficits continue to 
occur.
    What we tried do was to make sure in the analysis, in the 
plan that we put forward that we didn't make any cuts in the 
income support programs like SSI and food stamps and workers' 
compensation. In addition, we tried to make sure that on things 
like Social Security that we actually upped the minimum payment 
to 125 percent of poverty to help those people who really 
needed it. And we gave people a 1 percent bump-up per year 
between 81 and 86, because that is when every Democrat and 
Republican economist that came to see us said that is when 
people need it the most.
    So we tried to be sensitive to those people that were most 
disadvantaged while we did make the kind of cuts we had to make 
in order to put our fiscal house in order.
    Mr. Simpson. We have enjoyed our time with you during our 
work. And you have been very cordial and listened to us, and I 
appreciate that deeply.
    Representative Clyburn. Thank you.
    Mr. Simpson. The irony to me is that if we don't get there 
and the strike comes, the tipping point--Dick Durbin always 
asks, where is the tipping point? I don't know where it was, 
but I do know that it will come swiftly. And it will come by 
the ratings and the markets. It won't come by anything that any 
chart has ever disclosed before.
    And, at that point in time, interest rates will go up and 
inflation will go up. And the very people who will be hurt the 
very worst in that procedure are the very people you speak of 
with such passion. This is a tremendous irony to me. By doing 
little or nothing and the tipping point comes, the little guy 
is going to get hammered worse than ever he is or she is now. 
That is the irony--the strange, hideous irony.
    Representative Clyburn. That is true, Senator. But wouldn't 
you say that, if we were do it, let's do a $1.5 trillion 
deficit reduction and let's do it on the backs of those same 
people, then what happens to that chart in the next 30 years, 
where we have a 275 percent increase in income for those people 
who are in the upper 1 percent and if you are in the upper 
quintile you saw an increase of around 56 percent and the lower 
quintile only 18 percent?
    So let's just say, let's do it. Let's cut the deficit by 
$1.5 trillion. Let's do it by cutting Medicare, Medicaid, 
cutting Pell Grants, cutting education, cutting health care. 
And we will have saved the markets, but what will we have done 
to these 474 communities? That is my question.
    Dr. Rivlin. I think that is not a question that we should 
answer, because you shouldn't do that.
    And there are two points. And I think we are all making the 
same two points. One is, we need to cut the deficits, but not 
by hurting vulnerable people. You should avoid doing that. And, 
secondly, that the importance of avoiding a double-dip 
recession and a lost decade of growth is extreme and will hurt 
those people most if you don't avoid it.
    Mr. Domenici. I am the last here, and you have heard almost 
anything humankind can think of, but I would suggest to you 
that the answers that were given are really relevant and 
important.
    And one of the reasons that our group did not get as big of 
reductions in appropriated accounts as other plans was because 
we came upon the idea that we were going to have to come up 
with some revenue and we ought to have a budget that was 
understanding in this area, or it would, quite properly, be 
attacked with equal vigor to destroy it as we were trying to 
create a country that was strong again. And so we did take care 
of the problem you talk about.
    But I would tell you from my own experience as I leave the 
scene, one time I asked a very wise man, ``What do we do to 
help poverty?'' And the person said, ``I can tell you in one 
word.'' And I thought, you must have direct ties with the Holy 
Spirit. And he said, ``Educate.'' He said, ``Would you like it 
again? Educate.''
    Representative Clyburn. Absolutely.
    Mr. Domenici. And that is what he said, is that people must 
get educated. Well, that won't solve the bread on the table, 
but any plan you have in mind should obviously look at whether 
the poor people are getting educated or not.
    Representative Clyburn. I appreciate that.
    Mr. Domenici. And that is the first step out, has got to be 
that.
    And, secondly, the country has to grow or there is nothing 
to split, there is nothing to give to our people. So whatever 
programs you are talking about have to have growth in them. 
That is why all our tax plans are growth tax plans. Theirs is; 
ours is. We call it that. And we asked experts, and they say, 
your tax plan will cause far better growth than the plan we are 
under now.
    That is why we cut corporate taxes. And people shouldn't 
immediately say, what do you cut the fat cats for? They aren't 
making as much here to give to our people in wages because they 
are going elsewhere because our taxes are too high. So it is 
not what people say. The reality is competition. We can't force 
them to stay in America if our taxes are too high.
    So I think education and a fair tax for corporations 
belongs on this litany, maybe not first but somewhere.
    Chairman Hensarling. The time of the gentleman has expired.
    Representative Clyburn. Thank you.
    Chairman Hensarling. The co-chair now will recognize the 
gentleman from Michigan, Congressman Camp. And before I do, I 
just wish to thank him for arranging for the Joint Select 
Committee to use the Ways and Means Committee room. And your 
chair is very comfortable. Thank you.
    Representative Camp. Thank you.
    Well, I also want to thank our witnesses for being here and 
for all of your hard work and your testimony today.
    I do have a question. Mr. Bowles, in the Simpson-Bowles 
plan, you recommended that the United States move to a 
territorial tax system. And I agree with that recommendation 
because I think our current system is one that really means 
that our companies and workers aren't competitive. Do you share 
that view, and is that why you recommended moving to that 
system?
    Mr. Bowles. Yes. I have read your--I guess it is what this 
committee put out, the Ways and Means Committee put out, and I 
was very much in favor of what you put out.
    Representative Camp. Do you believe that--in our proposal 
or draft discussion we have out there, there are ways to move 
to a territorial system that does not create incentives for 
companies and employers to move jobs to other parts of the 
world, or their investment or their R&D. But, also, I think it 
is possible to craft a plan that could get that policy wrong.
    In the Commission's meetings, our discussions, you were 
focused on moving to a territorial plan that did not make our 
companies less competitive. And do you think that can be done 
in the context of a revenue-neutral territorial plan?
    Mr. Bowles. Yeah, I do. And I think, you know, if you 
encourage--if you stay on a worldwide system and you almost 
force companies to leave those dollars overseas, then, 
naturally, if they are going to have to pay a big tax on those 
dollars to bring them back, I think the likelihood is more 
probable that they are going to create the jobs somewhere else 
rather than here.
    And that is one of the principal reasons I support a 
territorial system, in addition to the fact that everybody else 
in the world has gone to it with the exception of us.
    Representative Camp. You also really recommended a complete 
overhaul of our Tax Code. And I appreciate the model that you 
set up, where you tried to lower rates in exchange for doing 
away with various provisions or exceptions in the Code. And I 
think that really has shifted the debate on what tax reform 
might mean.
    Your reform proposal would raise revenue compared to the 
current policy baseline, but you didn't do it by raising taxes. 
A lot of people get those two things confused. And why did you 
choose that route of raising revenue really through reform 
rather than imposing new taxes?
    Mr. Bowles. Because I felt like, based on my experience in 
the business world and the economists that I talked to, that it 
would create dynamic growth in this country and create jobs and 
opportunities for people. And I felt it just made sense to get 
the spending out of the Tax Code and to use that money more 
efficiently, more effectively by lowering rates and reducing 
the deficit.
    Representative Camp. All right. Thank you.
    Dr. Rivlin and Senator Domenici, in your plan, you have had 
the government's share of our GDP around 21 percent, I believe. 
Is that correct?
    Dr. Rivlin. Yes.
    Representative Camp. And that is basically $1 out of every 
$5 of our economy would come to Washington, D.C. And that is 
more than the highest levels of revenue we have seen in the 
history of the Nation. And I think there has been only one time 
where the government's take has really gotten anywhere close to 
that level, and that was during the Internet bubble because 
there were enormous capital-gains revenues associated with 
that.
    Did you perform an analysis of the impact on the economy 
and on job creation of having government's revenue of GDP reach 
that level?
    Dr. Rivlin. No, not ourselves. We examined other people's 
research on this. I don't read the record as having much 
evidence at all, of a connection between the exact proportion 
of the Federal Government's revenue and economic growth.
    The reason ours went up was, as I have stated earlier in 
the hearing, we didn't see how, in this very new situation of a 
much older population and the tsunami of the baby boom, we 
didn't see how we could fulfill our obligations to those 
people, and perform the other services of government without 
having the government in that range.
    It has been there before; it is not a disaster. This is not 
taking on new government responsibilities. It is just saying, 
we have a lot more older people and we have to take care of 
them. And that is going to mean slightly higher government 
spending than we had in the days when the population was a lot 
younger.
    Representative Camp. Senator?
    Mr. Domenici. Yes. Let me just say, I, too, in my past 
life, have used percentages like that. I have learned that on 
many of them there is no reality attached to the number. Nobody 
can tell you that 20 percent, 19 percent is better than 19.5 or 
20.6. If you have the rest of the policies right, things will--
in our kind of economy, we will get growth.
    The problem we have in this country has been expressed over 
and over here today, and that is that the population is growing 
older, the population has less workers per retiree, and so you 
have a--when we looked at the 19 or 18.5 that was used as the 
historically significant number, we didn't have these 
demographics, we didn't have this kind of problem.
    So we solved it by trying our best to use the Tax Code to 
generate some extra revenue in the manner we have suggested 
here. And, at the same time, we have taken on the 
responsibility of some of the programs that are going to sink 
us if we sit by and say, we have to have 18.5 percent, and that 
is all on the revenue side, and then what are we going to do 
about the exploding costs of the programs? And I think we have 
solved it in a pretty reasonable manner. If you want to just 
say, let that one go out there, we will fix it someday, we 
can't fix Medicare to match the 21, much less the 18.5 that was 
historically right.
    So that is my answer. I think there is no absolutely 
positive evidence that any of these numbers are absolutely 
right. They are right, they are in the range, but if you do the 
other policies correct, we will survive with 21 percent, I am 
sure.
    Representative Camp. You also had two new tax structures in 
your proposal. One was what you described as a debt-reduction 
sales tax, or what most people would consider to be the value-
added tax. The other was the tax on sugared drinks, or 
beverages.
    Did you do an analysis about the cost of those two new tax 
structures, the implementation of two new tax structures on our 
economy and what that might mean?
    Dr. Rivlin. Well, you are right that we did have the debt-
reduction sales tax. We didn't call it a VAT, but you are 
right, it is analogous to that. I think that the Senator and I 
and the members of the group all believed that it would be 
sensible for the United States to move part of its tax burden 
off the income tax and onto a broad-based consumption tax. But 
this is not the moment to do that. And we realized that and 
eventually took it out, though we still believe in it, and 
revamped our income tax proposals to make up part of the lost 
revenue.
    The sugared drinks, you know, that is not going to change 
the economy. Whether it, at the margin, discourages people from 
drinking too much soda, I don't know. But we had some sentiment 
for doing it.
    Mr. Domenici. I would say, on the last one, sir, we didn't 
look at the economic significance of it. You have been chairman 
of a committee, and I understand you are now of a very 
significant--sometimes you are just outvoted and you have to do 
things that aren't necessarily the greatest.
    Representative Camp. Yeah, I get that part.
    Mr. Domenici. You got that.
    Representative Camp. All right. Thank you. Thank you very 
much.
    I yield back.
    Chairman Hensarling. The gentleman yields back.
    The co-chair now recognizes the gentleman from 
Massachusetts, Senator Kerry.
    Senator Kerry. Thank you very much, Mr. Co-Chair.
    First of all, I want to thank each of you for your 
extraordinary service, not just in this effort, which is 
important, but over the years. And we are particularly 
appreciative to this contribution to the dialogue. And I hope 
it will be a contribution to more than a dialogue, but to a 
result from this committee.
    I just want to spend a few moments on some of the context 
that brings us here.
    Administrator Bowles, you opened up with a comment that 
caught my attention--two comments. One, you said, this is the 
most predictable economic crisis in history that we are looking 
at coming at us, even as you pegged the minimum figure of $4 
trillion, which is what you think we ought to do. But then you 
said you are worried that you are going to fail. And I want you 
to speak to that for a moment.
    Mr. Bowles. You all have done a great job of stopping the 
leaks coming out of your committee for an extended period of 
time, but over recent days I have been able to put together 
some of the proposals that you all are considering. And I have 
also listened to some of the back-and-forth that has been in 
the press.
    And I have heard people talk about simply settling for $1.2 
trillion worth of deficit reduction, maybe $1.5 trillion, but 
more of the talk is at $1.2 trillion; doing it across the 
board, which is never the smart way to make any kind of--to 
control any of your budgets in any way, shape, form, or 
fashion. And I have even heard talk that if you end up doing 
$600 billion out of defense and $600 billion out of nondefense, 
that the day after the sequester takes place that you will have 
people in the House and the Senate be working to get around the 
sequester.
    I think that would be disastrous. I think people would look 
at this country and say, you guys can't govern. I think people 
would look at it and say, you know what, they are really not 
going to stand up to their long-term fiscal problems, and this 
is not going to be a powerful country in the future. And they 
would think that we were well on our way to becoming a second-
rate power. I think it would be a disaster.
    Senator Kerry. So I want to sort of build on that a little 
bit. We all know that the figure we should hit in order to 
stabilize the debt, which is the mission and ought to be the 
mission of the Congress, is $4 trillion.
    What is the impact in the marketplace, what would the 
impact be on a discounting of our debt, a write-down, if we hit 
$1.2 trillion or $1.5 trillion? Aren't we going to just be back 
here almost immediately with the very same issues sitting on 
the table?
    Mr. Bowles. You could lose the $1.2 trillion to $1.5 
trillion by an increase in interest rates back to the normal 
rate very quickly. You wouldn't be accomplishing very much if 
you did that.
    And plus, you know, the effect it would have on how people 
would look at this country would really be devastating. I can 
tell you, when we went through this whole debt default fiasco 
before August, I can tell you, globally, countries lost a lot 
of respect for America, and they lost confidence in us that we 
would really stand up and address our long-term problems.
    Senator Kerry. Now, Pete, I am sorry that Al had to leave, 
but you and I had the great pleasure of working together on a 
number of different issues, and I trust your judgment. And 
while we are not wearing partisan hats, hopefully, here, you 
are a Republican. And I would like you to share with us, sort 
of, your perception as a long-time legislator.
    When, in your memory, has a committee in Congress ever had 
the right to put together a proposal that would be voted on by 
expedited procedure in both Houses of Congress with a 51-vote 
majority without amendment?
    Mr. Domenici. The answer is never.
    But I would tell you, when we passed effectively in the 
Senate the bill that created the Budget Committee, it was an 
impoundment and budget act, as you recall. It was to 
deauthorize the authority of the President to impound and, at 
the same time, to create a Budget Committee. Senator Robert 
Byrd, the expert extraordinary on the Senate, spent weeks on 
end trying to figure out a way that you could assure the 
passage of bills that pertained to the budget and not destroy 
the filibuster rule. And, in the end, he quietly gave in.
    And the Budget Act, if you go look at it, it is a big, 
thick bill, but, nonetheless, if you read it and do what I did, 
I decided that it meant that I could take a reconciliation bill 
to the floor of the Senate and it could not be filibustered. 
And I defeated Robert Byrd because his own writing said he had 
found a way, without changing the rules of the Senate, to get 
around filibuster and give authority to a committee.
    So we gave the Budget Committee in the Senate the authority 
to act without filibuster. But nothing as powerful as this 
committee.
    Senator Kerry. And what would be the implication--I would 
like to ask all three of you. You answered this, to some 
degree.
    Director Rivlin, you have headed up the CBO, you have 
headed up the OMB, as well. What would be the implications, in 
your mind, of the United States of America not meeting what 
everybody understands is the financial challenge facing us, 
sort of, stabilizing the debt and beginning to get on a long-
term fiscal path? How would the world view this, particularly 
given the fragility of Europe right now and their efforts on 
Greece, Italy, Spain, et cetera?
    Dr. Rivlin. I think it could be devastating. I agree with 
Erskine and would be even stronger. I think we could face a 
long period of stagnant growth, another recession, which would 
be worse than the one we are slowly climbing out of.
    It is very hard to predict when this might happen or what 
the course might be. But, certainly, in the last few months, we 
have seen dramatically in Europe that sovereign debt of quite 
solid-seeming countries can go down very fast. And that could 
happen to us. And we could just lose the confidence of our 
trading partners and ourselves.
    I think the problem is, if we are seen by our own citizens 
as not being able to face up to problems and solve them, we are 
in deep trouble.
    Senator Kerry. And, importantly--I think it has been put on 
the table here clearly today, and I am sort of trying to 
reiterate this because I think it is important--it is possible 
to put revenue on the table to the tune of $1 trillion-plus, 
whatever, with tax reform, is it not? You do not have to raise 
the tax rates. In fact, you could do the tax reform with 
specific instructions to the tax committees to hold the rates 
down, lower the rates, get a lower range, broaden the base, 
correct?
    Dr. Rivlin. Right.
    Mr. Domenici. We actually went out of our way to get some 
experts together, the best experts in this town--and I think we 
know who they are--and asked them, does that section 404 give 
the kind of authority that you just alluded to, to direct to 
the committees that they perform the following and report it 
back? And that bill would carry with it in the Senate the same 
prerogatives that the original bill carried when you were 
created.
    Senator Kerry. Now, Pete, you and I met, and we talked 
about your concept with respect to health reform. And I 
appreciate the contribution of it, and I have been trying to 
work through how we might be able to do some of those things. 
There are some issues, I think, about how you guarantee the 
coordination of the lowest health-care plan and still get 
coverage in certain areas, but I don't want to get stuck on 
that for the moment. What I want to do is, sort of, deal with 
the bigger issue here.
    I assume all of you would agree that you can do structural 
reform in Medicare, in the entitlements, that is not 
necessarily just the premium support approach. Is that 
accurate?
    Mr. Domenici. That is accurate.
    Senator Kerry. Director Rivlin?
    Dr. Rivlin. Oh, certainly. There are several approaches. We 
like that one.
    Senator Kerry. And, for instance, the age thing that 
Senator Portman asked about, that is structural reform, isn't 
it?
    Dr. Rivlin. I actually wouldn't think of raising the age as 
structural reform.
    Senator Kerry. What would you think of? Give us some 
thoughts about structural reform that you think would 
conceivably alter it, whether it is dual-eligible, Part A, Part 
B. Are there other components? Or, how about this, that you 
begin to move the entire system off of fee-for-service where 
possible, where it works you would leave it, but you move into 
a value-based payment system?
    Dr. Rivlin. Yes. And that is roughly what we are proposing.
    Mr. Bowles. Senator Kerry, I have a lot of opinions about 
health care. I think the current system doesn't make any sense, 
to pay twice as much as any other developed country for health 
care and have our results rank somewhere between 25th and 50th. 
You know, we have 50 million, roughly, people who don't have 
health-care insurance. You know, I just ran the public health-
care system in North Carolina; it reports to the president of 
the university. And if you don't think those 50 million people 
get health care, you are crazy. They get health care, they just 
get it in the emergency room at five to seven times the cost it 
would be in the doctor's office. And that cost doesn't 
disappear; it just gets cost-shifted to those of us who have 
health-care insurance and in the form of higher taxes.
    You know, we have got to have real structural reform in 
health care. I believe all people ought to have health care, 
but I don't think anybody should get, on the government's 
checkbook or the taxpayers' checkbook, a Cadillac plan. I don't 
think anybody ought to get first-dollar coverage, because I 
think we ought to make sure that people have skin in the game.
    And if you are going to have everybody have coverage, then 
you have to have everybody have a medical home. And if 
everybody is going to have to have a medical home, then you 
darn well got to make sure that education institutions like 
mine are producing more primary-care doctors and more nurse 
practitioners and more physician's assistants and not so many 
specialists.
    I think if you want everybody to have prescription drugs, 
then I don't know why in the world you wouldn't have Medicare 
negotiate with the drug companies for prescription drugs if the 
taxpayers are going to pay for them. And I don't know why 
anybody who was getting drugs from the taxpayers ought not to 
have generic drugs.
    If you don't think that hospitals and doctors practice 
defensive medicine, you are absolutely crazy. They do. So we 
have to have some kind of real tort reform.
    And you are absolutely right, we have to go to paying for 
quality, not quantity.
    And at the end of the day, you know, nobody likes this, but 
without talking about death panels and that kind of crazy 
stuff, you are going to have to do something about the end-of-
life scenario.
    Those kinds of things have to be done if you are really 
going to address health care.
    Senator Kerry. Well, I thank you all.
    And I apologize to the chairman----
    Chairman Hensarling. The time of the gentleman has expired.
    The co-chair now recognizes the gentleman from 
Pennsylvania, Senator Toomey.
    Senator Toomey. Thank you very much, Mr. Co-Chair.
    And I also want to add my voice in thanks to the folks who 
have come here today for the work you have done. It has been 
enormously helpful.
    Let me touch on a couple of the issues and develop a few a 
little bit further, if I could.
    One, obviously, we all know, as a given, that the Federal 
revenue is ultimately a function of our economy. But I think it 
is worth noting, and I think you will all agree, that the 
growth in Federal revenue is related to the growth of the 
economy, but, in fact, Federal revenue will grow faster, as 
long as the economy is growing, than the growth of the economy.
    And since Dr. Rivlin is the professional economist on the 
panel, I wonder if you would just confirm that, as a general 
rule, if we have strong economic growth, we will have even 
faster Federal revenue growth.
    Dr. Rivlin. That used to be true, Senator, before we 
indexed the tax system. It is much less true now. If you have 
strong growth, Federal revenue will go up a little faster than 
the economy, not much. We gave away that tool, actually, with 
the indexing.
    Senator Toomey. All right. So we could have a discussion 
about how much that magnitude is, but, even now, there is some 
additional growth faster than GDP growth.
    One of the things that came out from our discussion with 
CBO about this is that one-tenth of 1 percent of additional GDP 
growth, on average, over 10 years they estimate results in 
about $300 billion of additional revenue to the government. 
Now, this is not perfectly linear, and I understand that, but, 
very roughly, if that were to be roughly true, less than half a 
percent of average greater economic growth would result in, 
coincidentally, about $1.2 trillion, which is the statutory 
goal here. I am not suggesting that that is an alternative to 
our doing the work that we do, but I think it underscores how 
important it is that whatever we do attempts to create an 
environment to maximize growth.
    My own view from the beginning has been that the most 
constructive thing we can do to maximize economic growth is 
major reform of both the corporate and the individual tax 
codes. I don't think there is any dispute about that. But I 
wanted to drill down a little bit.
    For instance, if we--there are many approaches one could 
take. Let's look at the individual side for a moment. And for 
the sake of argument, if we were to reduce the value of all the 
deductions that are currently available to individuals and we 
had an equivalent reduction in rates, for sake of argument, 
everybody agrees that would be very pro-growth. Is that right? 
There is a consensus on that?
    My understanding, from both Mr. Bowles and Senator Simpson, 
was that when you folks looked at this exercise of reducing 
deductions and credits and write-offs, lowering rates, you did 
it with roughly a 10-to-1 ratio. For every dollar that was 
dedicated to lowering rates, there was a dollar dedicated to 
deficit. I think you had suggested that it was, like, 92 to 8?
    Mr. Bowles. Yeah, that is correct. Yeah.
    Senator Toomey. So 10 to 1, 11 to 1, that was about the 
ratio. Do you recommend that we take an approach like that, 
where we would, on the individual side, do that kind of 
simplification, lowering of rates, and have a ratio comparable 
to that?
    Mr. Bowles. I think you will run into some of the problems 
that Senator Baucus brought up. That is why we presented two 
options. If you go with the zero plan and get rid of all of the 
tax expenditures, then you do create enough resources that you 
can use only 8 percent of the resources and still generate a 
trillion dollars' worth of additional revenue that could go to 
reduce the deficit.
    However, if you are going to go back and not get rid of all 
of these tax expenditures but you are going to keep some of 
them--like, some of the Democrats will want to keep the Earned 
Income Tax Credit, they will want to keep the child tax credit, 
some of you may want to go to a credit for mortgage--to help 
people with their mortgage debt, some people might want to go 
to a credit for charitable contributions.
    So anything you keep gives you a smaller pie to work with. 
So if you are still going to come up with a trillion dollars of 
deficit reduction, then that 1-to-10 ratio won't work anymore.
    Senator Toomey. Okay.
    Does everybody on the panel agree that if any package were 
to include net tax revenue it ought to come in the context of 
reform that actually lowers marginal rates?
    Dr. Rivlin. Yes.
    Mr. Domenici. Yes.
    Mr. Bowles. Yes.
    Senator Toomey. Okay.
    Let me move over to health care for just a second. I am 
glad, I think, again, that there was a consensus, I think it 
was unanimous, that it is our health-care costs that is driving 
the deficit and debt crisis that we have.
    It has been my view, and I wonder if anyone disputes this, 
that, in fact, it is our Medicare plan that essentially drives 
the entire health-care sector. And while there is, obviously, a 
significant private-sector component, to a large degree it is a 
reaction to, and it acts in the context of, what Medicare does. 
And so Medicare is the real driver of the entire health-care 
picture.
    Do you agree with that?
    Mr. Domenici. Yes.
    Dr. Rivlin. Yes. And there are instances in which Medicare 
has actually done significant reforms and the private sector 
has followed.
    Senator Toomey. Right.
    Mr. Bowles. And I only agree with part of it. You said that 
Medicare was the only--I am not sure you said ``only,'' but 
Medicare is one of the drivers of our deficit problem. It is 
not the only driver. I think it is the number-one problem----
    Senator Toomey. What I said was that health care is, and I 
meant to say is the primary driver.
    Mr. Bowles. Yeah.
    Senator Toomey. Senator Kerry talked about structural 
reform. It seems, in my view, meaningful structural reform 
means getting away from fee-for-service. To me, that is the 
heart of Medicare, that is the heart of the design. And because 
we use this terminology and assume that everyone knows it, I 
will take a crack at describing what I think of as fee-for-
service, and tell me if I have characterized it right.
    But, essentially, what we have is a committee here in 
Washington that specifies the price it will pay for every 
conceivable medical procedure, the circumstances under which it 
will pay it, the people who are permitted to perform it, where 
they are allowed to perform it, in which venue. And it is a 
completely, you know, government-controlled mechanism, which 
also, by the way, doesn't account for whether the outcome is 
successful or not and whether the procedure needs to be 
repeated.
    Is that a fair characterization of fee-for-service?
    Mr. Bowles. I think what I said earlier in answer to 
Senator Kerry was that I think we are going to have to move 
from paying for quantity to paying for quality. And I think you 
are saying something very similar.
    Senator Toomey. Well, I am. I think, at the heart of this, 
this necessarily creates all kinds of inefficiencies, 
misallocations, perverse incentives. And the solution has to be 
to get away from this.
    I guess my last question for everybody, are all of you 
confident that----
    Mr. Domenici. Before you proceed----
    Senator Toomey. Senator?
    Mr. Domenici [continuing]. I did want to make an 
observation, that we recognized that Medicare had some very 
significant problems of the type you are alluding to, and that 
is why we are here suggesting that it be changed.
    Senator Toomey. Right.
    Mr. Domenici. At the same time, we have explained why we 
said, as we move----
    Senator Toomey. Right.
    Mr. Domenici [continuing]. We don't move so quickly with 
getting rid of one and establishing the other that we lose both 
or lose all reform.
    Senator Toomey. One of the things that concerns me is that, 
as long as we leave a significant fee-for-service component in 
place, I worry about whether the reforms are capable of 
defeating the mechanism and the misallocations and the, sort 
of, perverse effects of that fee-for-service.
    So I would ask this. Do you think it is possible to devise 
a plan that would transition completely away from fee-for-
service, some kind of premium support model that is defined to 
ensure that the most vulnerable people have the coverage that 
they need?
    Mr. Domenici. Well, I will say, for the time being and for 
the foreseeable future, it seems to me you cannot do that. You 
have to go with some transition. You wouldn't get the other 
done.
    That was the question, whether you can get it done. I am 
not an expert. I didn't sign on for this job to be an expert on 
Medicare. That is why I don't answer some of your questions. 
But I am saying, practically, I don't think it could be done 
now under this circumstance. We have to do something----
    Senator Toomey. Well, I am not suggesting that so much, but 
I appreciate the response.
    Dr. Rivlin?
    Dr. Rivlin. Well, I agree with the Senator. I think that 
the idea--we believe that, actually, competition on a well-
designed exchange between comprehensive health plans, 
particularly capitated plans, they would win out in a fair 
competition.
    There are parts of the country, especially rural parts of 
the country, where it probably isn't feasible right now to do 
that. And that is why we think there ought to be a transition, 
and that it is much less scary for seniors to say, ``If you 
like what you have, you can stay with it, but you are going to 
be offered something which is likely better.''
    Mr. Bowles. Yeah. And I would say, if you look at some of 
the pilot projects in the Affordable Health Care Act, they have 
some good examples in there of experiments that are going on 
today to do just what you are talking about.
    Senator Toomey. All right. Thank you all very much.
    Chairman Hensarling. The gentleman yields back.
    The co-chair now recognizes the gentleman from Maryland, 
Congressman Van Hollen.
    Representative Van Hollen. Thank you, Mr. Chairman.
    And I want to join my colleagues in thanking all of you for 
your terrific service to our country in many different 
capacities.
    Mr. Bowles, thank you for recognizing that actions the 
Congress has already taken to date, including passage of the 
Budget Control Act, has already achieved projected savings of 
close to a trillion dollars in discretionary funds, which isn't 
far from the targets that all of you set in your work, the 
major difference being you actually had a higher part of that 
coming from defense cuts. Is that not the case?
    Mr. Bowles. We actually divided ours between security and 
nonsecurity.
    Representative Van Hollen. Right. And so you were at about 
$1.2 trillion in discretionary. Half of that is $600 billion. I 
think the figures will show that your proposals took more than 
has been taken to date from the defense side of the equation.
    But I want to--I think many of us view your general 
approaches here as balanced approaches, balanced frameworks. So 
I want to put the discretionary piece to the side for a minute 
because we have come close to achieving, in some cases 
overachieving, your targets.
    In Simpson-Bowles, as you mentioned, Mr. Bowles, you had 
about $500 billion gross cuts in Medicare and Medicaid. You 
actually took some savings out of that. Net, it was around $400 
billion.
    But on the revenue, I just want people to understand, 
because what you had in both your plans was genuine--what us 
budget geeks call genuine CBO-, Joint Tax Committee-scorable 
revenue. And, as you mentioned, Mr. Bowles, your baseline 
assumed as part of your deficit projections that we would have 
about $800 billion, which is equivalent to about the amount of 
money that would be generated from allowing the rates for the 
folks at the very top to lapse, correct?
    Mr. Bowles. That is absolutely correct.
    Representative Van Hollen. That is right. And then on top 
of that you had proposals, through tax reform and the other 
things you have talked about, to generate another about $1.2 
trillion. Isn't that right?
    Mr. Bowles. Right. We--that is exactly right.
    Representative Van Hollen. All right. And so, again, on the 
Budget Committee, when we are comparing that to what we call 
the current policy baselines, compared to CBO that is about a 
$2.1 trillion, $2.2 trillion tax cut compared to current law. 
Of course it is a--excuse me, revenue increase. Compared to 
current law, it is a tax break.
    And looking at your testimony, Dr. Rivlin and Senator 
Domenici, you come in about the same place, $2.2 trillion on a 
current law baseline, correct?
    Mr. Domenici. Right.
    Dr. Rivlin. Right.
    Representative Van Hollen. All right. So let me just ask 
one other question with respect to tax reform. I take it, from 
looking at both your reports, that you would want tax reform to 
be done in a way that maintains at least the current 
progressivity of the Tax Code. Is that correct?
    Mr. Bowles. Yes.
    Mr. Domenici. We worked very hard to do that in ours.
    Representative Van Hollen. Thank you.
    Dr. Rivlin. Ours is actually slightly more progressive than 
the current.
    Representative Van Hollen. Right. So at least the current 
progressivity of the Tax Code.
    Now, you have both, in your written testimony, suggested we 
may want do two-step processes, downpayment and then something 
else. Dr. Rivlin, Senator Domenici, you specifically say, as 
part of that downpayment, you would include about $450 billion 
of what you call tax expenditure savings.
    I assume, therefore, that you see that as something you 
could do for deficit-reduction purposes, not necessarily at the 
same time as tax reform. And I think, if I look at the ones you 
have picked out, you think that they could be what we call 
rifle shots. Is that right?
    Dr. Rivlin. Right. But it should be consistent with--our 
notion is you have a tax reform idea.
    Representative Van Hollen. Yes.
    Dr. Rivlin. You move some of it forward.
    Representative Van Hollen. That is right. And, again, on 
net, your tax reform ideas would generate $2.2 trillion on the 
current policy baseline, correct?
    Dr. Rivlin. Right.
    Representative Van Hollen. Okay.
    Let me talk a minute about jobs and the economy, because 
the Congressional Budget Office has said that about a little 
over one-third of our current deficit today is as a result of 
the fact that we have a very weak economy, we are not operating 
at full potential. So I think all of us agree that we need to 
get the economy moving again.
    Dr. Rivlin, you pointed out that your plan with Senator 
Domenici had about $680 billion in payroll-tax relief. And I 
think you said the other day on one of the Sunday shows you 
would, ``go bigger'' than the President's job plan.
    Do you believe that something like that is necessary at 
this time?
    Dr. Rivlin. Yes. I think we are in danger of slipping into 
stagnation, and we should do something about it.
    Representative Van Hollen. Mr. Bowles, would you agree that 
it would be a bad idea this coming year to have every working 
American see an increase in their payroll tax relative to last 
year?
    Mr. Bowles. Yeah, on the payroll tax that was in the 
President's proposal, I think it was about $240 billion out of 
a $447 billion?
    Representative Van Hollen. That is right.
    Mr. Bowles. And it is hard for me, as a fiscal 
conservative, to say this, but I could support a continuation 
of the payroll-tax deduction for, you know, another year for 
employees.
    It is very hard for me to understand how an approximately 
$600 deduction for the employer on a temporary basis is going 
to be enough to get them to hire a full-time, permanent 
$30,000-a-year employee. So I don't think I would support the 
payroll-tax deduction for the employer. I could see supporting 
it for the employee if we could pay for it.
    Representative Van Hollen. Okay. Thank you.
    Just----
    Mr. Domenici. Could I say----
    Representative Van Hollen. Yes?
    Mr. Domenici [continuing]. On our end, I am for what we 
told you we are for, but I wouldn't argue if you followed his 
suggestion. As I see it, it is still alive. And what he is 
talking about is certainly better than nothing.
    Representative Van Hollen. Got it. Thank you. Thank you, 
Senator Domenici.
    On health care--and, Dr. Rivlin, you have testified many 
times in front of the Budget Committee and stated that you 
thought that the Affordable Care Act introduced a number of 
very important innovations. I agree with you that we need to do 
more in terms of modernizing the Medicare system to focus more 
on the value of care and the quality of care versus the 
quantity of care.
    I do have a question with respect to your version of the 
premium support plan, the most recent one. And that is, if you 
are confident in the market forces driving down the prices and 
if your argument is that Medicare is driving those market 
forces, then why would you need a fail-safe mechanism? In other 
words, why would you need to say, if you don't achieve the goal 
we want in savings, you have to have GDP plus 1? And if it is 
not keeping track with the market, isn't that just a cost 
transfer to Medicare beneficiaries?
    Dr. Rivlin. Well, I am not absolutely certain how the 
markets will work. We have seen even in the limited market that 
is Medicare Advantage that in some places they work well and 
come in under the fee-for-service and in other places they 
don't. We think this is a much more robust plan than Medicare 
Advantage.
    But the reason you want the fail-safe is so the Congress 
will absolutely know what they are going to spend going forward 
on Medicare. It is not going to grow faster than this. It is a 
defined contribution. And we think that is very useful.
    And as for the cost-shifting, there might be some cost-
shifting, but then you could arrange it so that it is not cost-
shifting onto lower-income people--it is means-tested, as we 
were saying before--it is cost-shifting onto people who can 
better afford it.
    Representative Van Hollen. Right. Well, I think that, 
again, I mean, if we are confident that the market forces were 
going to work the way intended, then I don't think there would 
be a need for a backup. I do know that Members of Congress and 
folks who are on the Federal Employees Health Benefit plan, for 
example, they bid, different plans bid, and there is a defined-
support mechanism that is set in law, 72 percent-28 percent. So 
I am not sure why we would be proposing something different for 
Medicare beneficiaries.
    Let me just close, Mr. Chairman, by saying we asked, 
actually, CBO to take a look at some of these ideas, including 
one where we just had competition among the managed-care plans 
and another one where we threw in the wrinkle of premium 
support. It wasn't the second-lowest bidder. It was more along 
the lines of what some other plans did, which was just 
marketplaces. And just having competition among the managed-
care plans they said came out a score of about $9 billion 
between 2014-2021. Adding in this other mechanism achieved 
about--it took you up to a total of about $25 billion.
    So it is pretty clear, at least from these numbers--and we 
can take a look at them--that we are going to need to do other 
things, that this is not a panacea, at least according to CBO's 
numbers, for dealing with the Medicare challenge, that we need 
to look at a lot of these other innovative ideas that are out 
there, including some of the things that have been talked about 
today.
    Thank you, Mr. Chairman.
    Chairman Hensarling. Thank you.
    The gentleman yields back.
    All time for Member questions has concluded.
    However, I would note, prior to Senator Simpson's 
departure, he did mention, Mr. Bowles, that you had something 
you might want to present. Without objection, I would certainly 
yield you a couple of minutes if I understand you have 
something else you wish to present to this committee.
    Mr. Bowles. I can do it very quickly. I tried to think, if 
I were sitting in your shoes or I was the go-between as I was 
in the what became the Simpson-Bowles plan, if it was possible 
for you all to get to the $3.9 trillion deficit reduction, 
given where your positions are today, and I think it is, I 
think you can get this done, and I will just go through briefly 
the arithmetic. And, again, you have got to flesh out the 
policies, but if you look at where I understand the two sides 
now stand, and this is from just listening, which is what you 
have got to do if you are the guy in the middle, you know, the 
proposals for discretionary spending, and these are all above 
what the $900 billion and the 400 that was in the continuing 
resolution, so this is in addition to the $1.3 trillion worth 
of spending cuts that have already been done, but you all are 
between $250 and $400 billion of additional cuts on 
discretionary, so I assumed that we could reach a compromise of 
an additional $300 billion on discretionary spending cuts.
    On health care you are somewhere between $500 and $750 
billion of additional health care cuts. I assumed that we could 
get to $600, and I got there by increases in the eligibility 
age for Medicare that I discussed with Senator Kerry when he 
was talking to me. That is about $100 billion. That would take 
you from the 500 where the Democrats are to $600 billion, and 
it happens to come not on the provider side, which I think 
would kind of balance that out.
    On other mandatory cuts, you are somewhere between 250 and 
400, so I settled on 300 there, and we had enough cuts in our 
plan to get you to 300 on the other mandatory. Interest will 
obviously just fall out at approximately 400 billion, the 
savings there. You agreed actually on CPI in your two plans of 
approximately $200 billion. The total of that is $1.8 billion. 
That left me a little short.
    That gets me to revenue. And on revenue I took the number 
that the Speaker of the House, I had read had actually agreed 
to, and I was able to generate $800 billion through revenue 
from the Speaker's recommendation, and if you did that without 
dynamic scoring, but you did it, and, you know, on dynamic 
scoring I am kind of on the Reagan plan, trust and verify, 
which we talked about earlier. If it actually comes, great, you 
will use it to reduce rates or you will use it to reduce the 
deficit. But if you add the $800 billion there and you do that 
slightly on a more, make it so the code is slightly more 
progressive after you have done it than before, then I think 
you have really got something that you might be able to work 
with the Democrats on.
    That would give you an additional total of $2.6 trillion 
added to the 1.3 you have already done. That is $3.9 trillion 
in deficit reduction, and I think that would create a lot of 
excitement with people in the country, and I think it would go 
a long ways toward building up confidence that we really could 
stand up to our problems.
    Chairman Hensarling. Thank you, Mr. Bowles. You certainly 
created some excitement with the press, I think. I would say, 
don't necessarily believe everything you read and hear about 
the proceedings of this committee.
    I do want to thank every single member of the panel on 
behalf of the Joint Select Committee for Deficit Reduction, not 
just for your presence here today away from your businesses and 
your families, but, frankly, more important, the entirety of 
what you have lent to the body of work to try to really address 
a very real crisis that we face. I do thank you for that. Your 
testimony was certainly sobering and helpful, and not the least 
of which was timely.
    I do want to remind all members that they have 3 business 
days to submit questions for the record, and I would ask our 
witnesses to respond promptly to the questions. Members should 
submit their questions by the close of business on Thursday, 
November 3rd.
    With no other business before the committee, without 
objection, the joint committee stands adjourned.
    [Whereupon, at 4:35 p.m., the joint committee was 
adjourned.]
                            A P P E N D I X

              Additional Material Submitted for the Record

                           September 13, 2011

      The History and Drivers of Our Nation's Debt and Its Threats

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                           September 22, 2011

          Overview: Revenue Options and Reforming the Tax Code

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                            October 26, 2011

       Overview: Discretionary Outlays, Security and Non-Security

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                            November 1, 2011

                  Overview of Previous Debt Proposals

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