[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]




                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION




                            Serial No. 112-5


           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey            CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri               LLOYD DOGGETT, Texas
TOM COLE, Oklahoma                   EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California           JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah                 BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana          MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma             TIM RYAN, Ohio
DIANE BLACK, Tennessee               DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin            GWEN MOORE, Wisconsin
BILL FLORES, Texas                   KATHY CASTOR, Florida
MICK MULVANEY, South Carolina        HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas                PAUL TONKO, New York
TODD C. YOUNG, Indiana               KAREN BASS, California
FRANK C. GUINTA, New Hampshire

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director

                            C O N T E N T S

Hearing held in Washington, DC, February 16, 2011................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     1
        Questions submitted for the record.......................    51
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     2
        Prepared statement of....................................     4
    Hon. Timothy F. Geithner, Secretary, U.S. Department of the 
      Treasury...................................................     5
        Prepared statement of....................................     7
        Responses to questions submitted for the record..........    51
    Hon. W. Todd Akin, a Representative in Congress from the 
      State of Missouri, submission for the record: Wall St. 
      Journal article, ``5,100 More IRS Agents''.................    24
    Hon. Marcy Kaptur, a Representative in Congress from the 
      State of Ohio:
        Submission for the record: Report, ``Foreign Portfolio 
          Holdings of U.S. Securities,'' Internet address to.....    41
        Questions submitted for the record.......................    54
    Hon. Michael M. Honda, a Representative in Congress from the 
      State of Caliornia, questions submitted for the record.....    52
    Hon. Ken Calvert, a Representative in Congress from the State 
      of Caliornia, questions submitted for the record...........    53

                       DEPARTMENT OF THE TREASURY
                        FISCAL YEAR 2012 BUDGET


                      WEDNESDAY, FEBRUARY 16, 2011

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 2:54 p.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan [chairman of 
the committee] presiding.
    Present: Representatives Ryan, Garrett, Akin, Stutzman, 
Lankford, Ribble, Flores, Mulvaney, Huelskamp, Young, Rokita, 
Woodall, Van Hollen, Schwartz, Kaptur, Blumenauer, Yarmuth, 
Pascrell, Honda, Ryan of Ohio, and Wasserman Schultz.
    Chairman Ryan. The hearing will come to order.
    Sorry about the delay. We understand that everybody here is 
under a time crunch. I am going to, in the interest of time, 
make my opening remarks, as prepared, into the record instead 
of sharing the full text of my remarks now.
    But, briefly, I just wanted to say how disappointed we are 
that the President has failed to lead on the most important 
fiscal challenges of our time. There has been a lot of talk 
about the politics of taking on these challenges, and the 
conventional wisdom is that the politically safe thing to do, I 
suppose, is to do nothing. But I sincerely wonder about that.
    I wonder how long Americans are going to tolerate empty 
promises about their retirement security. I wonder how long 
they will put up with leaders who fail to lead us when we are 
staring a debt crisis in the face. Yes, we are running up to a 
statutory debt limit, but we are also running up to a real debt 
limit called the credit markets.
    We feel that it is our responsibility to do things 
differently, to lead where the President has fallen short. And 
that is exactly what we intend on doing in the days, months 
    With that, I will submit the rest of my statement in the 
record, and I will yield to Ranking Member Van Hollen for some 
brief opening remarks.
    [The prepared statement of Chairman Ryan follows:]

            Prepared Statement of Hon. Paul Ryan, Chairman,
                        Committee on the Budget

    Thank you, Secretary Geithner, for coming before our Committee 
today to discuss the President's budget.
    The President has disappointed us by presenting us with another 
budget that spends too much, borrows too much and taxes too much. It is 
a budget that will stifle job growth today and leave a diminished 
future for the next generation.
    Last year, the long-term fiscal trajectory in the President's 
budget was so bad that it came with a warning label, like a cigarette 
pack: Warning: Must appoint fiscal commission to fix this problem.
    But then, when his own commission put forward a set of fundamental 
entitlement and tax reforms, he ignored them.
    Despite the urgent need to rein in our runaway debt, the 
President's budget would add $13 trillion to debt--an unconscionable 
burden we're imposing on our economy today and our children tomorrow.
    To be sure, both parties share the blame for the unsustainable 
trajectory we're on.
    Nevertheless, this President has made our spending problems much 
worse with policies such as the failed stimulus and the new health care 
    To listen to my colleagues on the other side of the aisle, you 
would think these massive new spending programs have nothing to do with 
it. They blame the Bush tax cuts--even though they agree that most of 
these tax cuts should be made permanent.
    In fact, one of the President's own economic advisers, Austan 
Goolsbee, recently defended the Administration's use of rosy economic 
forecasts to make its deficits look smaller by saying that the 
forecasts actually understated near-term growth, because the estimates 
hadn't factored in recent tax relief for all Americans.
    So the Administration is admitting that low tax rates are good for 
growth, even as their budget is calling for $1.6 trillion in higher 
taxes on American families, businesses and entrepreneurs just two years 
from now.
    Ironically, that's when the Administration's forecasts predict that 
economic growth will really take off. Must be all those tax increases.
    On our nation's most pressing fiscal challenges, the President has 
failed to lead. Former Clinton Chief of Staff and co-chair of the 
fiscal commission, Erskine Bowles, said the White House budget request 
goes ``nowhere near where they will have to go to resolve our fiscal 
    The policies contained in this budget would commit us to the 
bankruptcy of our entitlement programs and the managed decline of our 
    The President has asked us to raise the debt limit. But the 
experience of Europe teaches us that we cannot keep making unaffordable 
promises without eventually hitting a real debt limit--a limit on our 
borrowing imposed by credit markets in a state of panic.
    The politically safe response, I suppose, would be to do nothing. 
But I wonder about that.
    I wonder how long Americans will tolerate empty promises about 
their retirement security. I wonder how long they will put up with 
leaders who fail to lead us--when we are staring a debt crisis in the 
    We feel that it's our responsibility to do things differently--to 
lead where the President has fallen short. And that's exactly what we 
plan to do.
    With that, I will yield to Ranking Member Van Hollen for an opening 

    Mr. Van Hollen. Thank you, Mr. Chairman. And I will also 
work to shorten this up.
    Welcome, Mr. Secretary.
    I think that the President has laid out a proposal that is 
tough but responsible--tough because it cuts nonsecurity 
discretionary spending by $400 billion over the next decade to 
the lowest share of the economy since the Eisenhower 
administration; responsible because it steadily reduces the 
deficit, while making targeted investments in areas like 
education, clean energy, infrastructure, and scientific 
information--investments that the Chairman of the Federal 
Reserve, Ben Bernanke, said would help strengthen the economy 
in his testimony here last week.
    That approach, the President's balanced and responsible 
approach, stands in stark contrast, I believe, to the 
Republican majority's reckless approach that they are taking on 
the floor of the House as we speak. That proposal will put more 
Americans out of work when too many families are still 
struggling to make ends meet and do virtually nothing to 
address our Nation's long-term deficit problem.
    That is one of the reasons that the bipartisan commission 
on deficit reduction recommended against taking deep and 
immediate cuts, because they recognize the economy remains 
    Now, one other point here, because yesterday, in this 
committee, we heard a lot of our Republican colleagues 
criticize the President's budget for it not reaching primary 
balance--in other words, no longer spending more than we have--
by the year 2017. In fact, many ridiculed the notion that 
reaching primary balance over the next 10 years was an 
important milestone.
    I would point out first that the bipartisan commission did 
not reach full balance in that 10-year window. And yesterday, 
in the spirit of recognizing that achieving full balance in the 
short term is difficult, I pointed to the one Republican plan 
that has been put forth and scored by CBO. And that is the plan 
that the chairman of the committee has put forth. And he has 
put it forth in good faith.
    But I had hoped that my comments in that regard would have 
been somewhat cautionary, because, as I indicated, CBO has 
looked at that plan, and it doesn't reach primary balance by 
the year 2020, and--in fact, I misspoke yesterday--it doesn't 
reach primary balance by the year 2040. It doesn't reach 
balance until sometime between 2040 and 2060--until after 2060, 
actual balance.
    So I would just caution my colleagues that, to the extent 
that you are going to be criticizing the President and the 
administration for not reaching balance fast enough and 
ridiculing the notion of primary balance in the next 10 years, 
you are also criticizing the one proposal that has been put 
forward to date, and you are doing it more so, because the 
President's budget gets to that balance----
    Chairman Ryan. Would the gentleman yield?
    Mr. Van Hollen. I am happy to yield.
    Chairman Ryan. This proves how tough this is. This proves 
what kind of a hole we are in. And it is not your fault; both 
parties are responsible for where we are. It proves how 
difficult this is.
    And the reason we are so disappointed in this current 
budget is because it does nothing to address the drivers of the 
debt. And when you even do address the drivers of the debt, you 
can see how tough it is to get out of the hole we dug ourselves 
    Mr. Van Hollen. Yeah. If I could just say, I agree it is 
difficult. In fact, I am offering this caution in the spirit of 
a common recognition that it is difficult.
    But I had hoped that, just by making that remark, sort of 
in the spirit of recognizing how difficult it is, that we 
wouldn't have heard so much from some of your Members 
criticizing the President's budget on that particular point. 
Because it is an important milestone, to reach primary balance 
in this 10-year period. And, as Jack Lew pointed out, by 
definition, you have to go through primary balance before you 
get to full balance.
    So I only say this, Mr. Chairman, to say how hard it is, 
but we spent the rest of the day listening to your Members 
criticize the President for reaching primary balance in 2017 
rather than full balance. So I think it is only fair play to 
say that the one good-faith effort on the Republican side that 
has been scored to date doesn't get close to that in 2020 and 
doesn't do it until after 2040.
    But I hope that--obviously, you are going to be presenting 
a budget this year. That will be the next effort. And let me 
just close with this: We look forward to working with you 
wherever possible to find common ground in that effort.
    Thank you.
    [The prepared statement of Mr. Van Hollen follows:]

 Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
                        Committee on the Budget

    Thank you very much, Chairman Ryan. Welcome, Secretary Geithner and 
thank you for joining us today.
    President Obama has laid out a budget proposal that is tough but 
responsible. Tough because it cuts non-security discretionary spending 
by $400 billion over the next decade to the lowest share of the economy 
since the Eisenhower Administration. Responsible because it steadily 
reduces the deficit while making targeted investments in areas like 
education, clean energy, infrastructure, and scientific innovation--
investments that Federal Reserve Chairman Ben Bernanke said would 
strengthen our economy when he testified here last week.
    One key area of investment that the President has proposed is in 
our nation's infrastructure. The American Society of Civil Engineers--
hardly a left wing group--issued a report card on the state of 
America's deteriorating infrastructure. They give us practically 
failing grades, mostly Ds and D-minuses for the state of our roads, 
schools, transit, and drinking water--not grades that we'd want our 
kids to bring home from school. I'm very pleased that the President has 
announced he wants to make investments in this area. As reported 
yesterday in USA Today, using the analysis of the Associated General 
Contractors--again, not a liberal group, his plan could create about 
5.4 million construction jobs and 10 million more jobs in related 
industries and the broader economy. At a time when the construction 
industry is facing over 20 percent unemployment, these are exactly the 
kind of smart investments that will help grow our economy.
    The President's balanced and responsible approach stands in stark 
contrast to the Republican majority's reckless plan for this year, 
which is being debated on the House floor today. That proposal will put 
more Americans out of work at a time when too many families are still 
struggling to make ends meet, and do virtually nothing to address our 
nation's long-term structural deficit. The Economic Policy Institute 
found that the Republican proposal would likely put 800,000 Americans 
out of work. Indeed, that's why the Bipartisan Commission charged with 
reducing the deficit warned against making deep, immediate cuts when 
the economic recovery is still fragile. And why would Republicans cut 
essential investments in kids, cops, cancer research, and consumers 
rather than eliminate huge taxpayer subsidies to the oil industry?
    House Republicans have also taken a reckless approach to the debate 
on the debt ceiling--an issue that you, Mr. Secretary, have raised 
serious concerns about. In fact, you have said that ``even a very 
short-term or limited default would have catastrophic economic 
consequences that would last for decades. Failure to increase the limit 
would be deeply irresponsible.'' Chairman Bernanke stated that 
defaulting would be ``catastrophic.'' We simply cannot play games with 
the full faith and credit of the United States. Nor should we provide 
payments to foreign creditors--including China--before payments to 
American contractors, Social Security and Medicare recipients, and the 
salaries of our Armed Forces, as various Republican proposals would do. 
This is reckless and wrong.
    Yesterday, we heard many of our Republican colleagues criticize the 
President's budget for not reaching primary balance--no longer spending 
more than we have--by 2017. In fact, many ridiculed the notion that 
reaching primary balance over the next 10 years was an important 
milestone. I would point out that the Bipartisan Commission did not 
reach full balance in the 10-year window. Yesterday, in the spirit of 
recognizing that achieving full balance in the short-term is difficult, 
I pointed to the one Republican plan that has been put on the table and 
scored by CBO--that of the Chairman. That good faith effort does not 
get to primary balance in 2020. In fact, it doesn't get to primary 
balance until sometime between 2040 and 2060. And it doesn't reach full 
balance until sometime after 2060. So today, as we speak with Secretary 
Geithner, I would caution our colleagues that criticizing the 
President's budget on that score also applies--but to a much greater 
extent--to the one Republican proposal that has been made to date. We 
look forward to seeing the next budget effort that House Republicans 
put forward, and we stand ready to work with you to find common ground 
whenever possible.
    On another note, it is interesting that our Republican colleagues 
have criticized the President for not including more of the Bipartisan 
Commission's recommendations in his budget when every single House 
Republican serving on the Commission voted against their final report.
    That being said, in order to tackle our longer-term fiscal 
challenges--beyond the 10-year period of this budget--it is important 
that the White House and the Congress, Republicans and Democrats, come 
together to seriously discuss and consider the ideas in the 
Commission's proposal. Compromise is not a dirty word. Getting things 
done requires give and take. We should begin that conversation now.
    Thank you, Mr. Chairman, and we look forward to Secretary 
Geithner's testimony.

    Chairman Ryan. Great. Great. We will stick with all our 
other criticisms of the President's budget then.
    Secretary Geithner, the floor is yours.


    Secretary Geithner. Thank you, Mr. Chairman and Ranking 
Member Van Hollen and members of the committee. It is a 
pleasure to be before you today to talk about these important 
    I should say at the beginning, Mr. Chairman, that I agree 
that you deserve a lot of credit for laying out a comprehensive 
plan. I don't agree with a lot of the content of that, but I 
agree that you deserve a lot of credit for laying out something 
comprehensive. And you will have the chance, now that you are 
in the leadership, to put together a resolution that lays out a 
10-year path for dealing with these challenges. And, of course, 
we look forward to working with you on how best to get there.
    The President's budget presents a comprehensive strategy to 
strengthen economic growth and expand exports with investments 
in education, innovation, and the Nation's infrastructure. And 
we do that by presenting a detailed, comprehensive, multiyear 
plan to cut spending and to reduce deficits.
    Our deficits are too high, and they are unsustainable. Left 
unaddressed, they will hurt economic growth and leave us weaker 
as a nation. We have to restore fiscal responsibility and go 
back to living within our means.
    The President's budget cuts the deficits he inherited in 
half, as a share of the economy, by the end of his first term. 
These cuts are phased in over time to protect the recovery. In 
order to make it possible for us to invest in future growth and 
to restore sustainability, the President proposes to reduce 
nonsecurity discretionary spending to its lowest level, as a 
share of the economy, since Dwight Eisenhower was President.
    To achieve this, the budget proposes a 5-year freeze of 
nonsecurity discretionary spending at its 2010 nominal level, 
which will reduce the deficit by more than $400 billion over 
the next 10 years. As you know, the President also proposes to 
reduce the request for defense, to freeze civil service 
salaries, to improve efficiency in government by reducing and 
eliminating a range of programs.
    These savings create the necessary room for us to make 
targeted investments in support of reforms that will help 
strengthen future economic growth.
    And the most important thing we can do to help promote 
long-term growth is to improve the quality of our education 
system, to invest in innovation, and to rebuild our Nation's 
infrastructure. Without these investments, we will be weaker 
and less competitive.
    As part of this strategy for growth, the President proposes 
reforms to our tax system designed to encourage investment. We 
propose to put in place a permanent and expanded tax credit for 
research and development; to eliminate capital gains taxes on 
investments in small businesses; to encourage advanced 
manufacturing in clean energy; to keep taxes on investment 
income--this means dividends and capital gains--low; and to 
make college more affordable for middle-class Americans.
    These tax incentives are accompanied by reforms that would 
reduce incentives to shift income and investment outside the 
United States and to close loopholes and tax preferences that 
we cannot afford.
    Now, in addition to these changes, we propose to pursue 
comprehensive corporate tax reform that would lower the 
corporate tax rate. Our present system, as you know, combines a 
very high statutory rate with a very broad range of expensive 
tax preferences for specific industries and activities. We need 
a more competitive system that allows the market, not tax 
planners and lobbyists, to allocate investment, a system in 
which businesses across industries pay a roughly similar share 
of earnings, a system that provides more stability and 
certainty, that is more simple to comply with. And we have to 
do all of this without adding to our future deficits.
    We have begun the process of building support for 
comprehensive tax reform on the corporate side. I think we have 
a chance to do that now, and I hope we can work with this 
committee to help make that possible.
    The President's budget also outlines some responsible 
reforms on the individual side. We propose, as we have in the 
past, to allow the 2001 and 2003 tax cuts for the wealthiest 3 
percent--2 percent of Americans to expire; limiting certain 
deductions for those same high-income Americans; restoring the 
estate tax to 2009 levels; and closing the carried-interest 
    These proposals will help ensure that the savings we 
achieve together through spending cuts are devoted to deficit 
reduction, not to sustaining lower tax rates for the most 
fortunate 2 percent of Americans.
    This budget would achieve the dramatic reforms and 
reductions in our deficit over the next decade that are 
necessary to stop the national debt from growing as a share of 
the economy and to stabilize the debt burden at a level that 
will not threaten future growth. But these are only a first 
step, a down payment on the longer-term reforms necessary to 
address those long-term deficits.
    To deal with those longer-term deficits, as you all know, 
the deficits we face over the next century, not just the next 
decade, we are going to have to build on the cost-reduction 
reforms that are achieved in the Affordable Care Act. And 
although it is not a contributor to our short- and medium-run 
deficits, we need to work together across the aisle to 
strengthen Social Security for future generations.
    We can't grow our way out of these deficits. They are not 
going to go away on their own. And they won't be solved by 
cutting deeply into programs that are critical to future growth 
and competitiveness. We have to find a consensus on a multiyear 
plan that cuts where we can so that we can invest where we need 
and that reduces deficits. Making a multiyear commitment will 
allow us to make sure that the changes are phased in as the 
economy recovers. And making a multiyear plan will give 
businesses and individuals adequate time to adjust and prepare 
for future changes.
    This is a starting point for the discussion, and we 
recognize there are many ideas on both sides of the aisle. And 
we know, as you do, that we need both parties and both houses 
of Congress to come together to enact solutions that work best 
for the country.
    Now, in December, we were able to find bipartisan consensus 
on a very strong package of tax incentives to help sustain the 
recovery and restore confidence. We want to bring that same 
commitment, that same spirit of bipartisanship to the challenge 
of restoring fiscal responsibility.
    Thank you.
    [The prepared statement of Secretary Geithner follows:]

       Prepared Statement of Hon. Timothy F. Geithner, Secretary,
                    U.S. Department of the Treasury

    Chairman Ryan, Ranking Member Van Hollen and members of the 
Committee, thank you for the opportunity to appear before you today to 
discuss the President's Fiscal Year 2012 Budget.
                            i. introduction
    When the President took office two years ago, the U.S. economy was 
in the middle of its deepest recession in more than 50 years. The 
economy was contracting at a rate of 5 percent per year, and private 
businesses were cutting more than 700,000 jobs per month.
    In the face of this crisis, this Administration and Congress put in 
place policies that helped pull the economy back from the brink and 
established the basis for the ongoing recovery. Today the economy has 
grown for six straight quarters. Businesses have started to hire again 
and have added more than 1.3 million jobs since the labor market began 
to recover. Economic activity has accelerated over the last few months, 
supported by strong private demand.
    This past December, the Administration and Congress agreed to a 
bipartisan tax package that will help ensure that the recovery 
continues. This agreement prevented a tax increase on middle class 
Americans, and also included crucial Administration initiatives--such 
as a temporary payroll tax cut, an extension of unemployment insurance 
benefits, and immediate expensing for certain business investments--
that will provide a substantial boost to economic activity.
    Consumers and businesses are now expressing more optimism about the 
future, suggesting momentum that will sustain growth in the coming 
months. At the same time, private sector analysts have issued more 
optimistic near-term forecasts and are projecting stronger growth in 
2011 and 2012.
    However, we still face very substantial economic challenges. 
Millions of Americans remain out of work, and families across the 
country are still struggling to make up for losses in their savings and 
in the value of their homes.
    The President has outlined a broad strategy to help strengthen 
economic growth with investments in education, innovation, and the 
nation's infrastructure. Alongside those investments, we must reform 
the nation's finances to restore fiscal responsibility. Our deficits 
are too high and they are unsustainable. Left unaddressed, these 
deficits will hurt economic growth and make us weaker as a nation. We 
must go back to living within our means.
    The Budget presents a detailed plan to cut spending and reduce 
deficits. The President's Budget cuts the inherited deficit in half as 
a share of the economy over his first term; includes proposals that 
will reduce deficits by more than $1 trillion over the next 10 years; 
and cuts non-security discretionary spending to its lowest level as a 
share of the economy since Dwight Eisenhower was President. These cuts 
are phased in over time to protect the recovery.
    In addition, the Budget sets priorities by balancing spending cuts 
with the need to protect investments in education, innovation and 
infrastructure. Under-investing in these areas would compromise our 
competitiveness. Finally, the Budget reaffirms our commitment to reduce 
tax expenditures and reform entitlement programs.
           ii. a credible commitment to fiscal responsibility
    The President's Budget meets the following five imperatives, all of 
which are necessary components of a credible commitment to fiscal 
     First, we must lower deficits over a multi-year period to 
stabilize or reduce the national debt as a share of the economy. 
Deficit reduction needs to be gradual to avoid endangering the 
     Second, we need to reduce overall spending as a share of 
the economy, with spending cuts targeted at programs we cannot afford.
     Third, we need to protect and expand investments in 
targeted areas crucial for future economic growth.
     Fourth, we must develop tax policies that promote growth 
and investment while maintaining fairness and fiscal responsibility.
     Fifth, we must restore fiscal responsibility over the long 
term by reducing the rate of growth in health care expenditures and by 
strengthening and extending the solvency of Social Security.
    The following sections outline in detail how the President's Budget 
meets each of these imperatives.
A multi-year commitment to stabilize the national debt
    While our deficits will decline in coming years as the economy 
continues to recover, economic growth alone will not be enough to 
stabilize our finances. In the absence of further action, the deficit 
is projected to remain near 4.5 percent of GDP for the rest of the 
decade, even after the economy is fully recovered. Under this scenario, 
the national debt held by the public will grow from 62 percent of GDP 
in 2010 to nearly 85 percent of GDP by 2021, the highest share since 
1948. Without reform, debt will continue to grow after 2021, as 
mandatory spending and interest payments on the debt grow faster than 
    Roughly speaking, stabilizing the debt as a share of the economy 
requires that outlays, excluding interest payments on the national 
debt, must equal revenues. This requires us to cut the deficit to 
approximately 3 percent of GDP and maintain deficits at about this 
level into the future.
    The President's Budget accomplishes this over the medium term. Our 
proposals cut the deficit in half by 2013, reduce it to 3.2 percent of 
GDP by 2015, and maintain deficits around 3 percent of GDP for the 
second half of this decade. Under our proposal, the national debt held 
by the public as a share of the economy stabilizes around 76 percent 
starting in 2013, although it rises slightly at the end of the 10-year 
budget window. Excluding the financial assets held by the government, 
such as student loans and other investments, our proposals stabilize 
the national debt held by the public as a share of the economy at 
around 68 percent.
    The pace of deficit reduction has to be calibrated to the path of 
recovery. Under the path envisioned in the Budget, significant deficit 
reduction starts in 2012 and accelerates in 2013 and 2014, due mainly 
to economic recovery and the expiration of support measures, and also 
due to Budget proposals that reduce the deficit. Starting in 2015, when 
the economy is projected to be closer to operating at full capacity, 
the Budget proposals will reduce the deficit by more than $150 billion 
each year on average through 2021.
    The tension between the need for fiscal responsibility in the 
medium term and supporting the recovery in the short term creates a 
difficult challenge for policy makers. Because changes made one year 
can easily be altered the next, the best way to resolve this tension is 
for Congress and the Administration to commit to a multi-year plan of 
fiscal responsibility, phased in over an appropriate time horizon.
    Committing to a multi-year deficit reduction plan would give 
businesses and individuals more certainty about the impact of future 
government policy. This can improve confidence today and help keep 
borrowing rates low. Moreover, committing to a multi-year plan would 
give businesses and individuals adequate time to adjust and prepare for 
future changes.
Cut spending and eliminate programs we cannot afford
    Meaningful deficit reduction requires serious cuts to government 
spending. The Budget proposes a five-year freeze of non-security 
discretionary spending at its 2010 nominal level, reducing the deficit 
by more than $400 billion over the next decade, and bringing the level 
of non-security discretionary spending to its lowest share of our 
economy since the Eisenhower Administration.
    This will not be easy. The President has asked each agency to make 
tough choices, and the Budget includes more than 200 terminations, 
reductions and savings proposals. The President has also asked civilian 
government employees to share responsibility for reducing deficits and 
has proposed freezing their salaries for two years, which will save 
more than $60 billion over the next 10 years. Finally, we are 
continuing to make government more efficient by reducing administrative 
overhead costs, reforming the government purchasing process, and 
embracing competitive grant programs.
    In addition to cutting current non-security discretionary spending, 
the President is asking departments and programs outside of the 
spending freeze to reduce their future spending. Specifically, the 
Department of Defense is pursuing a variety of strategies to reduce 
defense spending; as a result, the Budget reduces defense spending by 
$78 billion over the next five years, relative to last year's Budget 
proposal. Secretary Gates believes these savings can be realized 
through reducing overhead costs, improving business practices, and 
cutting excess or troubled programs, and will not weaken our national 
    In addition to cutting spending, the Budget includes two proposals 
that will reduce our future obligations. The Budget proposes giving the 
Board of the Pension Benefit Guaranty Corporation (PBGC) the authority 
to adjust gradually the premiums it charges pension plan sponsors. This 
will encourage companies to fund their pension benefits fully while 
improving the PBGC's long-term financial position. Premium increases 
would be phased in, starting in 2014. The Budget also includes a 
proposal that would provide short-term relief to states and employers, 
while encouraging states to put their unemployment insurance programs 
on firmer financial footing. Together these two proposals would reduce 
the federal deficit by $60 billion over 10 years.
Increase investment in areas important to economic growth
    It is not enough to spend less; government must also spend more 
wisely. The President's Budget sharply restrains overall spending, but 
it also invests in important areas where the government has a clear 
role to provide public goods that promote future economic growth and 
competitiveness: education, innovation and infrastructure.
     Education: An educated and skilled workforce is critical 
for the United States to compete in the global economy. Workers with a 
college education not only earn higher wages for themselves, but 
increase the productivity of those who work with them and of the 
economy overall. The need for additional investment in education is 
striking: America has fallen to ninth among advanced countries in the 
proportion of young people with a college degree. The Budget proposes 
targeted investments in education to help us regain our competitive 
    We propose to strengthen investments in programs across every stage 
of a child's education. The Budget includes $350 million for the Early 
Learning Challenge Fund, a program that would apply the lessons learned 
from the successful Race to the Top program to early education, and 
dedicates $100 million to help prepare 100,000 new teachers in science, 
technology, engineering and math over the next 10 years. The Budget 
also recommits to maintaining the maximum Pell grant award and to 
making permanent the American Opportunity Tax Credit, which provides up 
to $10,000 for a student for four years of college. These two programs 
help make college affordable for millions of students and their 
     Innovation: Investments in research and development (R&D) 
produce the technological advancements that contribute to productivity 
growth and improvements in U.S. living standards. However, businesses 
may under-invest in R&D because they do not capture the full social 
returns on their investments. The President believes that government 
has an important role to play in promoting technological progress, and 
the Budget includes $148 billion in R&D investments for this year to 
support basic research and clean energy.
    These include maintaining the Administration's commitment to 
doubling the investment in basic research conducted at the National 
Science Foundation, the Department of Energy's Office of Science, and 
the National Institute of Standards and Technology labs. The Budget's 
proposal to increase the federal investment in the National Institutes 
of Health to a total of $32 billion will support innovations in 
biomedical research, improving future health care outcomes and economic 
    The Budget also provides $8.7 billion for clean energy technology, 
including more than doubling investments in energy efficiency research, 
development, and deployment; increasing renewable energy investments by 
over 70 percent; and expanding investments in the Advanced Research 
Projects Agency--Energy (ARPA-E).
     Infrastructure: Infrastructure is critical to economic 
growth and competitiveness, and yet our current investments in 
infrastructure are insufficient and often inefficiently allocated. In 
addition to a $50 billion up-front investment in transportation 
infrastructure to create jobs in occupations that have been hit hard by 
the recession, the Budget lays out a long-term plan for sustained, 
targeted investments in the most effective infrastructure programs and 
    The Budget proposes a six-year surface transportation 
reauthorization that increases average annual investment by $35 billion 
per year, in real terms, over the previous six-year authorization plus 
passenger rail funding appropriated in those years. This proposal 
includes $30 billion to create a National Infrastructure Bank, which 
will attract private capital to infrastructure projects while improving 
the process of allocating infrastructure funds. The proposal also 
includes $32 billion in competitive funding to encourage states and 
cities to reform their transportation programs to focus on more 
efficient and effective investments. We are committed to working with 
Congress on a bipartisan basis to ensure that there is sufficient 
revenue to keep the underlying Transportation Trust Fund solvent, 
because these investments must be fully paid-for.
    Taken together, the Budget balances two priorities that guide our 
approach to government spending. First, spending cuts are necessary to 
lower the deficit. At the same time, we must protect targeted, 
responsible investments that allocate limited government resources 
towards programs that will boost economic growth and promote job 
creation over the long run.
A tax system that supports growth, fairness and fiscal responsibility
    Strengthening our competitiveness and restoring fiscal 
responsibility will require reforms to our tax system.
    Starting with revenue provisions that promote investment in 
innovation and clean energy, the President's Budget includes a series 
of specific tax policy changes that help us move towards a more 
efficient, fair and competitive tax system that will support economic 
    Specifically, the Budget proposes making an expanded research and 
experimentation tax credit permanent, thereby increasing certainty for 
businesses making crucial long-term investments that will lead to more 
innovation. In addition, in order to support investment in clean energy 
technology, the Budget proposes tax credits for advanced manufacturing 
facilities, energy-efficient commercial buildings and an improved 
credit for plug-in vehicles.
    The Budget proposals also reduce the incentives for multinational 
firms to shift income and assets to their foreign subsidiaries. 
Finally, the Budget proposes a fee on financial firms to recoup the 
costs of the extraordinary financial assistance the government put in 
place to resolve the crisis.
    In addition to these proposals, we must pursue comprehensive 
corporate tax reform to create a competitive tax system that raises 
sufficient revenue in the most efficient, simple and fair way. The 
current system for taxing corporations and business hurts economic 
growth by placing burdens on U.S. businesses that negatively affect 
their investment and employment choices. Because of various loopholes 
and carve-outs, some industries pay an average rate that is four or 
five times higher than others, and although our statutory corporate tax 
rate is one of the highest in the world, we raise about the same amount 
of corporate tax revenue as our major trading partners.
    Moreover, because of the high rate and because of the various 
loopholes and carve-outs, too many businesses end up making investments 
based on what their tax planners recommend, instead of what sound 
business judgment would suggest. This puts our entire economy at a 
disadvantage. As the President has announced, in consultation with the 
business community and other stakeholders, the Administration is 
examining ways to lower the corporate tax rate and to eliminate 
provisions that negatively affect investment. By pursuing these two 
objectives together, we can enact reform that does not add to current 
or future deficits. I look forward to working with you on this 
important endeavor.
    Balancing the budget requires sacrifice from all Americans, but 
should also promote fairness for the middle class.
    The Budget proposes reducing the value of certain tax expenditures 
on the wealthiest Americans by limiting the value of itemized 
deductions to 28 percent for high income households. This is a down 
payment on reform of the individual income tax system.
    This provision alone will generate enough revenue to fully protect 
the middle class from a dramatic expansion of the Alternative Minimum 
Tax (AMT) for three years. The Budget calls on Congress to find 
additional ways to pay for permanent AMT relief, because if left 
unaddressed, the AMT will inappropriately sweep up tens of millions of 
families into this parallel tax system. Working with Congress to fully 
pay for AMT relief after 2014 would lead to an additional one percent 
of GDP in deficit reduction by the end of the decade.
    In addition, the Budget proposes to reform the taxation of carried 
interests in financial partnerships, to close the loophole that allows 
some to pay tax at lower capital gains rates on what is effectively 
    We must also allow the 2001 and 2003 tax cuts for married couples 
with household incomes above $250,000 (and $200,000 for single filers) 
to expire and return the tax on large estates to 2009 levels. The 
President has been clear that we cannot afford these tax cuts for the 
wealthiest Americans, which do very little to support economic growth. 
Allowing these temporary tax cuts to continue indefinitely would 
increase the deficit by nearly $1 trillion over the next 10 years.
Fiscal sustainability over the long run
    While stabilizing the debt-to-GDP ratio over the medium term is an 
important down payment on long-term fiscal stability, we must also 
reform entitlement programs, as entitlement spending is projected to 
increase more quickly than revenues due to an aging population and 
growing health care costs.
    We made important progress on entitlement reform last year by 
passing the Affordable Care Act (ACA). Independent analysts have 
estimated that the ACA will significantly slow the growth of medical 
costs, relieving both government and businesses of some of the pressure 
of rising medical expenditures. According to the most recent analysis 
from the Congressional Budget Office, the ACA is estimated to reduce 
the deficit by more than $200 billion from 2012 to 2021, and by more 
than $1 trillion in the following decade. The most important step we 
can take right now for long-term deficit reduction is to implement the 
ACA fully and effectively.
    Still, we know that more is needed, which is why the Budget 
includes additional provisions that address our rising medical 
expenditures. The Budget proposes $62 billion in specific savings in 
health programs that will fully pay for two years of relief from 
physician payment rate cuts called for by the Sustainable Growth Rate 
formula. The Budget calls for a long-term, fiscally responsible reform 
of physician payments that provides incentives to improve quality and 
efficiency while ensuring that payments will be predictable. A long-
term solution will build on the fully paid-for, one-year relief for 
physicians enacted this past December. In addition, the Budget includes 
$250 million in grants to encourage progress on medical malpractice 
reform, which can reduce over-utilization of some expensive procedures 
without compromising patient outcomes.
    Finally, the President is committed to strengthening Social 
Security. Together with Congress, we will consider ideas that put 
Social Security on more sound financial footing over the long term. 
However, we will reject plans that slash benefits; that fail to protect 
current retirees, people with disabilities and the most vulnerable; or 
that subject Americans' retirement savings to the whims of the stock 
                            iii. conclusion
    America is at a fiscal crossroads. We cannot pretend that our 
budget problems are merely the result of the financial crisis, nor can 
we pretend that we can restore fiscal responsibility without real 
sacrifice that affects all Americans.
    Unless we act today, the national debt will continue to grow as a 
share of the economy over the medium run, even after the economy is 
fully recovered. Without reform, an aging population and rising health 
care costs will cause entitlement spending to grow more quickly than 
revenues in the long run, putting increasing strain on the budget and 
causing deficits to remain elevated far into the future.
    If the debt were to continue to grow as a share of the economy, an 
ever-increasing share of revenues would have to be devoted just to 
paying the interest on the national debt, so that in 2020 interest 
payments would be nearly as large as all defense spending. Such 
escalating interest payments would create an unsustainable cycle that 
would eventually force dramatic adjustments. Without appropriate 
reforms, this path would have consequential effects on the U.S. 
    While it is apparent that adjustments are necessary, we need to 
choose our path wisely. Cutting services and programs too much, too 
soon would jeopardize the recovery and destroy tens of thousands of 
jobs. Cutting the deficit today without making a long-term commitment 
to fiscal responsibility could enable a return to profligacy in the 
future. Cutting spending indiscriminately would force us to cut 
investments in vital public goods, and focusing reform solely on 
spending would impose an undue burden on those most in need while 
ignoring the opportunity to make our tax system more simple, fair, and 
    The President's plan navigates these challenges. The Budget lays 
the foundation for long-term growth while cutting spending in order to 
reduce the deficit. Making a multi-year commitment to the principles 
embodied in the President's Budget will reduce the risk of future 
crises, reassure investors and provide certainty about the future path 
of spending and taxes. In addition, a multi-year commitment will help 
ensure that borrowing costs remain low, making home ownership and 
higher education more accessible for Americans and making long-term 
investments more attractive for American businesses. Together the 
increased certainty and improved confidence will contribute immediately 
to economic growth and job creation.
    History provides many examples of how past Congresses have made 
similar multi-year commitments. In some cases, Congress made permanent 
changes to policy that lowered the deficit over many years. For 
example, the 1983 amendments to Social Security extended the solvency 
of the Social Security Trust Fund for several generations. In other 
cases, Congress adopted budget rules that locked in a path of deficit 
reduction, limiting future deficit spending. For example, discretionary 
spending caps and PAYGO rules for mandatory spending and revenue 
legislation adopted in 1990 and 1993 contributed to reductions in the 
budget deficit, and eventually to budget surpluses.
    Restoring fiscal sustainability will require courage from both the 
Administration and Congress, as we cannot move forward without 
compromise. We know compromise is possible. The December tax agreement 
proves that we are capable of forging agreements that move our economy 
    There is no doubt that Members of this Congress--in both parties 
and both houses--have many good ideas of their own for promoting fiscal 
sustainability. While we believe the President's Budget is 
appropriately balanced in its priorities, we look forward to working 
with you to make a commitment that reflects our common ground--creating 
American jobs and promoting long-term economic growth.
    Thank you, and I look forward to taking your questions.

    Chairman Ryan. Thank you, Secretary.
    A couple of questions, but first I want to get into credit 
    Would you agree with me that if we stay in the current 
fiscal trajectory indefinitely, that we are not going to be 
able to maintain a AAA credit rating?
    Secretary Geithner. Let me say the positive way of saying 
it: that I am very confident that this body will make the 
changes necessary for us to preserve that status. It is very 
important we do that.
    You know, I think if you look at markets today, there is a 
lot of confidence in the political will of this country to get 
ahead of this problem, but we have to earn that confidence over 
    Chairman Ryan. Agreed. So, last month, Moody's gave us a--
they laid out a debt trajectory in which the U.S. Could face a 
credit rating downgrade by mid-decade. Obviously, you take that 
risk seriously, and confidence matters a lot.
    So if the administration continues to punt, using The 
Washington Post's words, on entitlement reform, aren't we 
inviting a credit downgrade and market turmoil? I mean, how 
does that inspire confidence?
    Secretary Geithner. Well, I would like to come back to 
where you--this is the central choice in strategy. I think as 
you know better than anybody, we face two different types of 
deficit problems, drivers to the deficit. Over the next 5 to 10 
years, we have an unsustainable fiscal position. We have to get 
that down to a level where the debt is not growing as a share 
of the economy.
    Without that, nothing else is possible, and we will do a 
lot of damage to future growth and confidence. That is very 
important. That is why you need to bring the deficits down over 
the next 3 to 5 years to something that achieves primary 
balance. That is a minimum necessary.
    Now, the entitlement programs we have in place today are 
not contributing significantly at all to those near-term 
deficits, but they are the substantial driver of the deficits 
that come in the next decades. As you know better than 
    Chairman Ryan. Which is the long-term trajectory.
    Secretary Geithner [continuing]. Without addressing those, 
we are left with commitments that will eat away too large a 
share of income--completely unsustainable.
    Now, the Affordable Care Act, although I know it is not 
popular on your side of the aisle, does make a very substantial 
contribution to reducing the rate of growth in costs and will 
reduce our deficits over the next two decades by $1.2 trillion.
    Now, we would like to build on that with you. The President 
has laid out some additional suggestions we think we can do 
with you on that, but we need to build on those thing. But that 
is a pretty good first step towards entitlement reform.
    Chairman Ryan. The way we want to build on it is repeal it 
and then go in a different direction. That is, I guess, what we 
would call building.
    I am not going to get into the claim. I would definitely--I 
could throw some charts up--I could definitely go at the claim 
of the savings from the Affordable Care Act. That is not the 
path I want to go down.
    Secretary Geithner. Luckily, you and I don't get to decide 
that. The CBO gets to decide.
    Chairman Ryan. That is right. That is right. And if you 
want to go down that rabbit hole, we can. When they say that 
this law is going to increase the debt, I don't know how you 
get there without increasing the deficit.
    But putting that aside, the assertion on primary balance is 
an important one. And the assertion in the budget on the 
primary balance assumes we are going to have, you know, in 
2013, 4.4 percent growth rate; blue chip is at 3 percent; CBO 
is at 3.1. In 2014, your budget assumes 4.3 percent growth; 
blue chip is at 2.8 percent; CBO is at 3.5 percent. You don't 
get to primary balance if those projections by CBO or blue chip 
    And so the question I have is, in 2013, the top income tax 
rate goes to 44.8 percent. That is the Federal. You throw in 
all the States that have income taxes, and it is above 50 
percent in most States. The top income tax rate will be 
higher--because international competition obviously matters 
here--it will be higher than France, than Britain, than Italy. 
Our capital gains tax will be higher than China. Our capital 
gains tax goes to 23.8, and the top rate on dividends in that 
year alone goes to 45.4 percent.
    Are we going to have this boom of economic growth that you 
are predicting, which is how your budget achieves primary 
balance, if we are hitting small businesses, entrepreneurs, 
successful investors, or job creators with huge tax increases 
in that very year? How can you claim all this growth in the 
year of 2013 when you have this massive tax increase on job 
creation and then get primary balance?
    Secretary Geithner. Let me just say a couple things in 
    The growth assumptions in the President's budget imply a 
level of growth, on average, that is lower than what occurred 
in the last two recoveries. It is a reasonably conservative 
    Now, CBO's is lower because CBO was forced to make the 
assumption that all those tax cuts on every American expire at 
the end of 2012. And that would hurt growth, absolutely. But we 
are proposing, of course, to maintain and extend those tax cuts 
for 98 percent of Americans. And so, these proposals would not 
result in that damage to growth that CBO has to build into 
their estimates.
    Now, one other point on this----
    Chairman Ryan. But tax increases affect economic vitality 
and affect behavior and growth.
    Secretary Geithner. Well, you know this debate, you know 
this debate. And I will give you two responses, because you are 
comparing us to the other major economies in Europe.
    The best way to compare the tax burden that is projected in 
this budget to those economies is to look at what happens to 
revenues as a share of GDP over the budget horizon. And they 
will leave us slightly above the long-term average but way 
below--way below--the amount of revenues those countries 
collect from their citizens and their businesses. So that will 
leave us with a much more competitive tax system than any of 
those countries are contemplating facing in this context.
    Now, one other thing about these forecasts, or two other 
things. One is, OMB estimates this year's budget much higher 
than CBO----
    Chairman Ryan. The deficit, you mean.
    Secretary Geithner. Yeah, sorry, the deficit--much higher, 
much more conservatively estimated. It is probably too high.
    So there are some things in this forecast that are more 
conservative than CBO, some things perhaps a little more 
optimistic, a little more confident than CBO. But, in the end, 
CBO will rule, in this case. That is a good strength of our 
    And you are right to say, if CBO--when CBO----
    Chairman Ryan. About 3 weeks.
    Secretary Geithner [continuing]. Scores the impact of our 
projected policies on their projected economy, they will show a 
somewhat larger budget deficit than we estimate in this 
    And, again, one strength of our country is, CBO is 
independent, nonpartisan, and they govern in this context. So 
you and I don't need to debate these assumptions, because they 
will choose for us.
    Chairman Ryan. Yeah. So the point I am trying to make here 
is, I question the assertion of primary balance, given that the 
final arbiter, CBO, on this is using a different set of 
projections. And you are not going to get there with what I 
think is a deeply inadequate budget.
    Secretary Geithner. No, but you are--I would distinguish a 
couple things. And, again, you are going to have the chance to 
propose a 10-year budget----
    Chairman Ryan. Right.
    Secretary Geithner [continuing]. That does better, and you 
will make different choices than we did. But I think we can all 
agree that it is necessary but not sufficient. Achieving 
primary balance doesn't go far enough. We will have to do 
better than that over time.
    Chairman Ryan. Okay. Because I don't want to chew up too 
much time, on debt limit you sent us a letter saying you want a 
clean debt limit because you think it ought to be done 
    I simply just want to point out--and I don't want to get 
into it, because I want to get to these other Members--last 
time the debt limit occurred, in the last session, PAYGO was 
attached to it. It was the engine that, sort of, drove the 
train off, you know, through Congress. And the President was 
perfectly complicit with this. He was obviously in favor of it; 
he signed it. The fiscal commission, itself, was attached and 
passed through Executive order in exchange for the debt limit.
    So let's not say that we are only for clean debt limits 
when, just a year ago, the President was fine with attaching 
things on debt limit. That is just a point I want to make.
    Last thing, the corporate tax reform. It is a little vague 
in corporate tax reform in the budget. What do you mean 
    And then I assume you are talking about deferral, I assume 
you are talking about foreign tax credits as one of your 
revenue-raising or base-broadening provisions. Wouldn't just 
going to a territorial system, kind of, fix those problems? And 
what is your position on going to a territorial system?
    And then I want to turn it over to Mr. Van Hollen.
    Secretary Geithner. Okay. Just one quick thing on the debt 
limit. We are suggesting it is best and easiest and cleanest 
and most responsible to do a clean debt limit extension for 
reasons you understand. You know, this is not a popular thing 
for people to do, and if you let people negotiate over the 
terms, the risk is you leave people with expectations you can't 
meet. And it is just that that suggestion leads us to suggest 
you should do it clean.
    Now, we recognize that we are going to have a big debate 
about how to bring down these deficits over time. And we are 
looking forward to having that debate. And I believe, as I 
think you do, it would be good for the country now for us to 
come together and agree on a multiyear plan that would lay out 
enforceable commitments. Because then the markets would have 
more confidence in our political system's willingness to deal 
with this. So we are for doing that.
    But one last thing on the debt limit. I would just 
encourage you not to do anything that will call into question 
the commitment of this country--we are the United States of 
America; we don't play around with this stuff--to make sure we 
meet our obligations. And don't allow the markets to build in 
any concern about our willingness or ability to do that, 
because that would put at risk this recovery and set us back 
substantially. We can't afford that risk.
    Now, on the question about corporate tax reform, you are 
right that, in the budget, we did not propose a comprehensive 
plan for corporate tax reform. But we are beginning the process 
of trying to lay out the foundations of that.
    And what we would like to try to do is do a comprehensive 
reform that would lower the statutory rate significantly, bring 
it much closer to the range of our trading partners, do that by 
broadening the base substantially, eliminating these expensive 
expenditures and special preferences, do that in a way that is 
revenue-neutral and strengthens incentives for investing in the 
United States.
    As part of that, we are going to have to examine how we tax 
the worldwide income, foreign income of U.S. corporations.
    Chairman Ryan. Right.
    Secretary Geithner. But as we look at that and we look at 
all forms of territorial, we have to be careful, again, not to 
be increasing opportunities or incentives to shift income and 
investment outside the United States. That will hurt jobs in 
this country. That is a difficult thing to do, but we will look 
at all ideas in that context.
    Chairman Ryan. You have no explicit position on worldwide 
versus territorial----
    Secretary Geithner. No, because, again, I think this--you 
would want us to take this approach. We have to be careful, 
again. Overwhelmingly, why would we do this? We do it because 
we want to improve incentives for investment----
    Chairman Ryan. We want jobs and competitiveness.
    Secretary Geithner. Exactly. That is why. So, as you look 
at that test, you have to make sure everything meets that test.
    And when you look at a lot of the proposals for 
territorial, they usually fail on two grounds. They either lose 
a huge amount of income, because they make it easier to shift 
investment income outside the United States, or they hurt jobs 
by, again, magnifying the incentives to shift investment 
outside the United States. And so, for those reasons, you have 
to be careful, looking at those.
    But, again, we will look at everything----
    Chairman Ryan. Yeah.
    Secretary Geithner [continuing]. But we will be governed by 
those tests: lower the rate, broaden the base, revenue-neutral, 
and more competitive, stronger incentives for investment.
    Chairman Ryan. We will pick this up at Ways and Means, I 
    Mr. Van Hollen?
    Mr. Van Hollen. Thank you, Mr. Chairman.
    Mr. Secretary, thank you, again, for your testimony.
    I want to pick up on a couple points that the chairman 
raised, first with respect to the debt ceiling. We had the 
chairman of the Federal Reserve, Ben Bernanke, here, who has 
said that a failure of the United States to meet its debt 
obligations and to make sure that we protect the full faith and 
credit of the United States would be, quote, ``catastrophic.'' 
You have said similar things.
    There have been proposals introduced in the Senate and the 
House by Republican Members which take the position that we 
should pay our bondholders, like foreign governments, like 
China, first before we would pay Medicare recipients, Social 
Security recipients, members of the armed services, U.S. 
Government contractors.
    Could you just talk briefly about two things: One is what 
the impact would be of that on the credit markets; and, two, 
what you think about the fairness of that proposal.
    Secretary Geithner. Well, you know, I have written and 
spoken publicly on this before, and you know the arguments very 
well. But let me try and do as an example--I think this is the 
most simple example you can use.
    If you think about a family sitting around the table, if 
they decide they are going to not pay their utility bill, not 
pay their credit card, not pay their mortgage, so they can pay 
their car loan, they will be judged in default by their 
    So this idea that somehow you can minimize the pain to the 
country, minimize the damage to our credit and our credibility 
by, in effect, not meeting your obligations, some obligations, 
while you meet others is, I think, mistaken.
    And it won't buy us any time, and it won't deprive this 
Congress of the responsibility of raising the limit. So I 
wouldn't go there and don't think it helps at all.
    And, again, we will be, every month, letting economists 
know what our latest estimate is of when we will run out of 
room. And we will be very open with the Congress of where we 
have some flexibility to buy a little time. But the important 
thing to recognize is, because our deficits are so large, the 
traditional forms we have do not buy that much time.
    So, again, I know this is a challenge to do and not a very 
fun thing to do. You are going to have the privilege a lot of 
your predecessors have had of doing this. And my suggestion is, 
do it in a way that makes sure the markets understand that we, 
the United States of America, will meet our obligations. We 
will never cast doubt on our commitment to meet our 
obligations. We are a serious country.
    And we will do that while we have a debate about how we 
figure out how to bring these deficits down to a sustainable 
level. And we recognize, as you do, that that is going to 
require, again, both houses, both parties working together.
    Mr. Van Hollen. Well, the chairman of the Federal Reserve 
warned not only about the catastrophic consequences of it, but 
he urged the Congress not to use the debt ceiling as a, quote, 
``bargaining chip.'' And I hope that we won't play politics 
with the full faith and credit of the United States.
    Let me pick up on some of the other questions raised by the 
chairman regarding tax policies. You indicated the President's 
budget assumes that we will continue the current tax rates for 
98 percent of the American people but that we can no longer 
afford to provide a tax break to the folks at the very top.
    By our rough calculation, over a 10-year period that saves 
close to a trillion dollars if you include the debt service. 
Does that square with your calculations, approximately?
    Secretary Geithner. That is right. Another way to say it 
is, the cost for extending those tax cuts for the top 2 percent 
of Americans and the more generous estate tax exemptions and 
rates would be roughly a trillion dollars over 10 years.
    Mr. Van Hollen. Now, during the Clinton administration----
    Secretary Geithner. Another way to say that is that, to 
make that affordable and still reduce deficits, you have to 
find another trillion of spending cuts to make that possible. 
That is another way to think about it.
    Mr. Van Hollen. That is right.
    Now, during the Clinton administration, of course, we had 
higher tax rates in effect for the 98 percent of Americans we 
are talking about, and we also had it, obviously, at the top 
income. Do you remember what the GDP growth during that period 
was? We had Jack Lew here, who served during that period.
    Secretary Geithner. Well, it is true that, to allow those 
rates to revert to their level--they do without extension--
would restore them to the level that prevailed in the 1990s. 
And that was a period when you had probably the best record of 
small-business expansion we had seen in decades, best record of 
private investment growth, productivity growth, broad-based 
income growth, employment growth. So it was a very good time 
for the American economy at rates similar to those.
    Now, as the chairman might remind us, it is a little 
different because that doesn't capture some of the provisions 
of the Affordable Care Act. But, again, you are talking about 
rates that, in broad magnitude, prevailed in the 1990s. And 
that was an excellent period of remarkable growth in employment 
investment, led by small businesses in this country.
    Mr. Van Hollen. While we are on the Affordable Care Act, 
just a couple things, because the director of the CBO was right 
where you are last week on this question of their deficit and 
essentially said very flatly and clearly on the record that the 
CBO did not engage in, quote, ``double counting'' in coming up 
with the $230 billion savings.
    Now, there has been a lot of conversation in the last 
couple days about the need to bring some of the long-term 
health-care costs under control. And I think it is worth 
reminding people that the Affordable Care Act included some 
changes. For example, we got rid of the large subsidy for 
Medicare managed care plans. We made some other reductions. In 
fact, I think a lot of our Members are well aware of it, 
because they were on the receiving end of a lot of ads against 
them in the last campaign for some of the decisions they made 
in terms of reforming Medicare.
    Could you speak to that? Because I think that has been a 
little bit lost in the discussion over the last couple days.
    Secretary Geithner. Well, again, you guys have been talking 
about this for a long time, and I think you know everything 
there is to be known about this, but I would be happy to repeat 
the core tenets of this.
    Again, in our system, CBO scores for us savings and costs. 
In CBO's judgment--and, traditionally, they have been very 
conservative about estimating the savings that you get from 
health-care reform--health-care reform will save, over the next 
two decades, $1.23 trillion.
    Now, that is very substantial entitlement reform. It 
doesn't solve the problem completely. We recognize that we want 
to go beyond that. But if you put that in jeopardy, you will 
end up adding very substantially to our long-term deficits, and 
that will hurt our credibility in the markets more generally 
and undermine the market's confidence in our ability to get a 
hold of these basic deficits.
    Social Security, in contrast, is not a meaningful 
contribution to our long-term deficits. And there is a very 
good case to try to figure out how to lock in reforms in Social 
Security now that would help secure those benefits for future 
generations, but they are not a material contributor to our 
long-term deficits in any foreseeable time frame.
    Chairman Ryan. Because we started quite a bit late from the 
votes, we are doing 4 minutes. I think that gives everybody 
ample time so everybody can talk. It is not our intention to 
keep doing this. It is only because we want to make sure that 
people at the ends of the dais have a shot to ask.
    So, Mr. Garrett?
    Mr. Garrett. So I will say thank you and keep my remarks 
fast, and just a couple questions.
    But just, to the gentleman from Maryland, with regard to 
playing politics with the debt limit and what have you, I don't 
think anyone up here honestly wants to play politics with it. I 
think we want to all take a look at it seriously. But I think 
we also understand that no one in America believes that we can 
simply borrow our way into prosperity. And that would be the 
result if we simply take no action, as far as addressing our 
debt circumstance.
    To use your little example of sitting at the kitchen table 
paying your mortgage first, you pay your mortgage first, you 
don't go out and take another mortgage on top of that if you 
are in those dire circumstances.
    Turning to----
    Secretary Geithner. And I agree with you on that. We want 
to work together----
    Mr. Garrett. Right.
    Secretary Geithner [continuing]. To put in place multiyear 
commitments that reduce our deficits over a period of time in 
ways that don't kill future growth. We want to do that with 
you, and we don't want to wait to do that. We would like to do 
that. We just want to make sure that we don't call into 
question our basic credibility as a country on our obligations.
    Mr. Garrett. And one of those areas that I look forward to 
working with you on and I appreciate that the administration 
has come out with publicly with their position with regard to 
the GSEs, Fannie Mae and Freddie Mac, with regard to 
dismantling that, trying to get the private sector back into 
that sector. Better late than never, as far as your report, but 
I do appreciate it. Unfortunately, of course, your report, as 
you know, did not specify specifically one plan. It gave us 
various options.
    But one thing it did specifically say in there is that the 
Federal Government will stand behind the debt of these 
obligations, right? It says, ``Our commitment to ensuring 
Fannie and Freddie have sufficient capital to honor any 
guarantees issued now or in the future and meet any of their 
debt obligations remain unchanged.'' That means the Federal 
Government is behind it. And, ``Ensuring these institutions 
have the financial capacity to meet their obligations is 
essential to their continued stability.''
    So this is pretty explicit. Even though you and I have had 
the discussion as to whether this is sovereign debt or not, 
that off the table, that is still pretty explicit.
    The interesting thing here, just as an aside, is, we have 
been asking private sector, right, if they have these off-
budget things, to bring them back on the budget. Wouldn't that 
be good here? And I will just give you two examples. One, I 
have a legislation to do that. I would appreciate your comment 
on that.
    And, secondly, at a hearing just this week at Capital 
Markets, someone came up with an idea on this and how it 
actually may help save money to the taxpayers. That is, if you 
bring these things on line and put it on budget, both the 
portfolio, which would be the assets, and the outstanding debt, 
which would be the liabilities, on your own balance sheet, with 
the idea of assuming the debt, there would be basically a 
negligible impact upon the budget.
    And because of the spreads--then if you had the Treasury 
actually reissue the debt from these--and there is a spread of 
around 25 basis points difference between them, over the long 
term the amount of money that the taxpayers will actually pay 
out on these, as opposed to the way we are doing it now, if you 
brought it on budget, would be a cost savings to the taxpayers.
    Your comment on either one of those proposals?
    Secretary Geithner. First, I appreciate your comments on 
this reform plan and look forward to working with you on how 
best to put them in place. And you are right, we have to craft 
an ultimate solution in legislation.
    The two most important things of this are the following. 
One is, the markets have to understand that we will make sure 
these institutions have the resources they need to meet their 
commitments over time. And we are going to make sure we do 
that. And you know why that is so important.
    The second thing I would say is that you are right, there 
are lots of different ways to account for this stuff. But we do 
the necessary thing, which is we put on the budget, in a fully 
transparent way, the full costs of providing this support 
    Mr. Garrett. You know that the CBO treats these things 
different than the way the OMB does. And that is why we are 
suggesting that we have commonality in treatment. And this 
would not be--we were basically suggesting that the Treasury 
would have to do it the same way the rest of America would have 
to do it.
    Secretary Geithner. Yeah. But, again, I think we are 
meeting the best test of credibility, which is we show 
transparently the full cost on our budget of the mistakes these 
guys made in the past and what that means in the future on our 
budget. And we are going to continue to do that.
    But I know we will have a chance to talk about this more. I 
would be happy to do so.
    Mr. Garrett. Okay. And I am looking at the little clock in 
front of you that continues to go all over the board.
    Secretary Geithner. Yeah, exactly.
    Chairman Ryan. Jose, we have to buy a new clock.
    Ms. Schwartz?
    Ms. Schwartz. Well, I can't see the clock, so someone is 
going to have to let me know when it gets close so I can figure 
it out.
    Mr. Secretary, I want to thank you for your comments, and I 
appreciate what is really sounding like a pretty complex set of 
questions and answers. And I just want to do a couple of things 
quickly, if I could.
    First, I want to acknowledge that the President has put 
forward a very serious and very timely budget that does reduce 
the deficit in a way that doesn't hurt our fragile recovery--we 
are grateful for that recovery; we want to see it stronger--and 
then invests in our future. We appreciate that. In terms of the 
focus on reducing the deficit by $1.1 trillion, that is really 
important, bringing financial stability to the Nation, and the 
focus on spending cuts. It is all there. Tough cuts--I mean, 
$400 billion--getting to a trillion dollars is a lot of money.
    So what I wanted to ask you about--just before I get there, 
I want to just say that I appreciate the comment about the cuts 
that we did under the health law. We have neglected to talk 
about that, for the last week or so. I believe it was every 
Republican who was here at the time voted against what is 
essentially $1.2 trillion, almost $1.3 trillion, in deficit 
reduction. That is what it does. I believe it could do more. 
But we have to implement it, and we have to get about the 
business of making sure that we can bring down the cost of 
health care under Medicare, for Medicaid, for our government, 
and of course for the private sector, as well. So we need to 
talk more about that. And the President's leadership on that is 
to be acknowledged, in bringing down the deficit.
    The President's leadership also--and it has been mentioned 
here, as well--is also about the fact that tax expenditures 
also, if they are not paid for, add to the deficit. Just 
``yes'' or ``no,'' I mean, does a trillion dollars' worth of 
tax expenditures, if we don't pay for it, does it add to the 
    Secretary Geithner. Yes, absolutely.
    Ms. Schwartz. All right. The other side of the aisle seems 
to not count that. In fact, their rules say that they don't 
count tax expenditures as spending.
    I think the President has taken real leadership on this, in 
acknowledging that and in wanting to follow through on the 
budget deficit commission. And I want you to talk about that.
    I can't see the clock, but hold on to that notion. I want 
you to answer that, but I also want you to, if you would just 
very briefly, address an issue that came up in Ways and Means, 
I understand, around the trade adjustment assistance. And I did 
want to give you the opportunity to clarify your statement 
about how important it is to do trade adjustment assistance on 
its own as soon as possible. That has expired. And I did want 
to just give you an opportunity to say something about that.
    Secretary Geithner. Yes, thank you for giving me that 
chance. I will start with trade, and I will come back to the 
question about tax policy.
    It is very important we move ahead on trade adjustments. 
This is for reasons you all know. We would like to do that as 
quickly as possible. We expect to bring a Korea deal, a very 
strong Korea deal, to the Congress to consider relatively soon. 
We are working to strengthen the Colombia and Panama trade 
    Ms. Schwartz. Uh-huh.
    Secretary Geithner. And if we achieve the improvements we 
seek, then we will consult with Congress on how best to move 
those forward.
    But a critical part of our strategy for growing this 
economy is going to rely on getting exports to grow more 
rapidly. They are growing pretty rapidly now, but we want to 
build on that. And it is very important that we move trade 
adjustments as quickly as we can.
    Ms. Schwartz. Even before that. Thank you.
    And if you have anything----
    Secretary Geithner. On the tax--you know, again, I think 
the commission did a great service in pointing out to people 
how expensive these tax expenditures are. It is not just that 
they cost a huge amount of money, but if you look at who 
benefits from them, they are not particularly targeted to 
things that are that helpful for growth, and they go 
substantially to relatively fortunate Americans.
    So our view, as the commission suggested, is a critical 
test of reform of fiscal restraint, of fiscal responsibility is 
going to be to start to dial back some of those that are the 
most expensive, the least targeted, have less basic benefits 
for growth or for middle-class Americans.
    Ms. Schwartz. And if we did that, we might be able to lower 
the corporate tax rate, for example, and----
    Secretary Geithner. Well, on the corporate side----
    Ms. Schwartz [continuing]. On the individual side we might 
be able to make some changes, too.
    Secretary Geithner. Yeah. Thank you.
    Ms. Schwartz. I think my time is up, but my guess is we are 
going to be talking a good bit about that, as well. Thank you.
    Chairman Ryan. Thank you.
    Mr. Akin?
    Mr. Akin. Thank you.
    Mr. Secretary, a couple of questions. A lot of us have a 
number of questions. This is pretty straightforward. It 
appears, from a Wall Street Journal article, that we are going 
to increase the IRS budget by 9.4 percent, hiring an additional 
5,000 or 5,100 agents, at the cost of $460 billion.
    I suppose some of the reason that some of the tax money 
that the IRS thinks could be collected is not coming in could 
be because those tax manuals, when you stack them up on a 
little wagon, you know, they are about a yard high.
    Don't you think that perhaps we could save money and do 
things a lot more simply if we were just to simplify the Tax 
Code and skip the 5,100 IRS agents, not to mention the fact 
that it would make us all look better if we don't have a goon 
squad of 5,000 more IRS agents tromping around the country with 
the economy the way it is?
    Secretary Geithner. You are absolutely right. If we were 
able to simplify the Tax Code, not just corporate but 
individual, it would be easier for citizens to meet their 
obligations, easier to enforce, and that might save us some 
enforcement resources over time.
    But, you know, just a couple of comments in response to 
what you said. All the people that look at the way the IRS 
works say that, if you put a dollar carefully into enforcement, 
customer services, things like that, you get more than $4 back.
    Why is that fair? It is because, by helping people meet 
their obligations, you make sure that other people aren't 
bearing too large a cost of being citizens of the country. So 
it is just part of the test of a democracy and part of the test 
of fairness.
    And what we are proposing is a set of modest improvements 
in resources for customer service, for technology designed to 
make it easier for people to meet their objections. But, of 
course, you are right, if we were to dramatically simplify the 
code, that would help save some resources, too.
    Mr. Akin. I appreciate that. Somehow, rather the 9.4 
percent and the 5,000 IRS agents, I thought, oh, my----
    Secretary Geithner. Just one clarification. It is not 5,000 
IRS agents. A relatively small fraction of that is people you 
might call involved in the process of enforcement. A 
substantial fraction of those are customer service people and 
technology people, again, designed to make it easier for people 
who want to meet their obligations to meet their obligations. 
There are some people who don't want to meet their 
    Mr. Akin. I appreciate your trying to make that 
distinction. ``I am from the IRS, I am here to help you.'' That 
is hard to sell in the State of Missouri. But let me----
    Secretary Geithner. Remember, the IRS doesn't set what your 
tax obligations are. That is set by the Congress, by you in 
this room.
    Mr. Akin. I wanted to just mention that, you know, we have 
talked about the debt limit several different times, with 
different people asking you questions. And it has been pointed 
out that the PAYGO and some things were attached to it.
    If nothing else from sheer politics, it is helpful to put 
something with the debt limit, because you want people to vote 
for that silly thing. That is like swallowing a radioactive 
pill, and particularly for some of us that have just gotten a 
message from taxpayers.
    But I guess my concern is, if you submit a budget, the way 
you have, that has not really dealt with the entitlements and 
the massive problem there, and then you put in these 
assumptions about a tremendous level of growth while you are 
increasing taxes--I mean, I could understand it, looking at May 
of 2003, and you take a look at capital gains, dividends, and 
death tax. In flat-line scoring, it looks like, by golly, we 
are going to lose more money. And yet, when you take a look at 
it, the employment goes up, the GDP goes up, and, by the way, 
Federal revenues go up substantially year after year.
    But you are trying to make the same magic happen by 
increasing taxes. So I don't know, somehow, to me, it is hard 
for me to see the budget that you have submitted as really 
being politically willing to step up to a very, very hard 
    And that being the case, how can you then say to us, we 
want you to swallow this debt limit thing and don't put 
anything on it at all? I mean, the people back where I come 
from, they want fiscal responsibility, they want it now, and 
they don't want any excuses. And we are the ones that have to 
listen to them when they call us on the phone.
    And so, I don't know how you can say, well, the debt limit 
is just going to be a straight vote. There are going to have to 
be some guarantees, or it is just not going to get through.
    Thank you.
    [The Wall Street Journal article referred to follows:]
    Chairman Ryan. His time is up. We will just put him down as 
a supply-sider for IRS agents but not on tax policy, I guess.
    So, who was next?
    Secretary Geithner. Can I say that I have been a consistent 
supporter of, and there are in the budget, a variety of well-
designed incentives to encourage investment and low rates on 
investment income, because we recognize that that is important 
to future growth.
    And, as you know, Mr. Chairman, in the tax package we 
agreed to at the end of last year, we included some very 
powerful incentives for business investment, I think the most 
powerful we had ever seen--100 percent expensing for capital 
investment for 1 year for all businesses across this country.
    So we are----
    Chairman Ryan. That is one thing we liked, actually.
    Secretary Geithner [continuing]. We are earning some--we 
are demonstrating that we think that matters to growth.
    Chairman Ryan. Mr. Blumenauer?
    Mr. Blumenauer. Thank you.
    Mr. Secretary, appreciate you clarifying about the 
dedicated people who work for the IRS. To label these people as 
a goon squad, I think, is offensive on so many levels, and it 
might be the sort of thing that inspired that maniac to crash a 
plane into the towers. It was Congress that gave the IRS this 
mess to interpret.
    And, with all due respect, looking at the last time 
Republicans were in charge of the Tax Code, look at--I think it 
was a million extra words that were added to it. So let's--I 
welcome your call to tax simplification. It is Congress that 
made their job a nightmare.
    And any of you can try what I have done. I have met with 
accountants and attorneys in my community who wonder why in the 
heck we are not auditing anymore; why don't we invest 
strategically to collect money? But they do appreciate the work 
on customer service.
    And I hope we are not being reckless about talking about 
the people who work for you as being part of a goon squad. That 
is reprehensible.
    Secretary Geithner. Thank you for saying that. Of course, I 
completely agree. There is somebody----
    Mr. Blumenauer. But I want to get to my questions.
    Secretary Geithner. I am sorry. Go ahead.
    Mr. Blumenauer. I wanted to thank you. But we have had a 
lot of talk around here about the administration punting on 
entitlement reform. And I appreciate your reference to the fact 
that the single most important element of entitlement reform, 
the entitlement that is out of control, is Medicare. And you 
are committed in this budget to actually administrator that 
health-care reform, which has in it every single proven 
potential cost-bending effort----
    Secretary Geithner. Almost every one.
    Mr. Blumenauer. We didn't lay many of them out. They are 
not as strong as they could have been because people were a 
little nervous. What we should be doing is taking the newfound 
backbone and accelerating and strengthening them.
    These elements used to be bipartisan. In fact, they used to 
be nonpartisan. And so, we can battle all this other stuff, but 
zero in on the cost containment that is there.
    We had Dr. Berwick testify--I forget whether it was before 
our committee here or Ways and Means--pointed out that areas 
like Medicare Advantage, we have actually a reduction in 
premium. We have 12 million more beneficiaries. And there is a 
5 percent increase in the highly rated programs.
    This, to me, is a success story. And we ought to, as a 
Congress, be focusing on the facts and make it work better. 
Because if we don't do that, if we repeal the reform with 
nothing in place, we are going to have higher deficits, no 
matter how much we cut.
    But I want to get to the tax reform. I think Chairman Camp 
is very interested in working with you, as, actually, the last 
two administrations have been, to try to fix this corporate 
    I want to just point to one specific item. In fact, I will 
be offering an amendment on the floor in a while to implement 
what the administration called for, closing some of these tax 
benefits to the oil industry, some dating back to 1916, that 
most people think makes no difference on the production of oil.
    But I want to just zero in, because you have been in the 
middle of this debate. In a $2 trillion to $3 trillion global 
oil market, would the loss of $5 billion to $8 billion a year 
of tax benefits to oil companies make any difference on the 
price of oil?
    Secretary Geithner. No, it would have no effect on price, 
no effect on price.
    They are expensive, though. And, again, the more you 
sustain tax preferences like that for individual companies, 
industries, activities, all businesses across the country pay 
higher taxes to make that possible. So it is not good policy, 
it is not fair, it is not consistent with the kind of things we 
want to do to make the country stronger. So getting rid of 
those things is better for our competitiveness.
    Mr. Blumenauer. Thank you very much, sir.
    Chairman Ryan. Mr. Ribble?
    Mr. Ribble. Thank you, Chairman Ryan.
    And thank you, Secretary, for coming. I have enjoyed the 
conversation so far, and I have especially appreciated your 
tone. I think this country, more than anything, needs to really 
have an adult conversation among ourselves about what we want 
to see for the future, particularly entitlements. And I think 
you brought a bit of that adult tone today to this hearing, and 
I wanted you to know how much I appreciate that.
    Before I ask one other question, yesterday I heard from the 
President that this budget would stop adding to the national 
debt. Do you concur with that?
    Secretary Geithner. Well, what this budget does, again, on 
our assumptions for what Congress--if Congress enacts this, it 
will reduce the deficit to a level that achieves what we call 
primary balance, meaning it is balanced except for interest 
payments. And for an economy like ours, growing at the rates we 
expect over time, meaning our economy normally grows somewhere 
between 2\1/2\ and 3 percent over the long run, that means you 
have to get the deficit to around 3 or slightly below to 
achieve primary balance.
    And if you achieve that in the time frame we are 
suggesting, then you will stabilize our debt burden, net held 
by the public, net of financial assets, in the about 60, high 
60, 70 percent of GDP range. And that is a level that does not 
threaten future growth. That is a level that is sustainable 
over time.
    Now, we don't hold that over time because, without doing a 
better job on health-care costs, without building on the 
Affordable Care Act, those deficits will start to grow again, 
and the debt will start to rise again as a share of GDP. And 
that is why, again, it is so important to move.
    Mr. Ribble. Because wasn't the debt actually----
    Chairman Ryan. Will the gentleman yield for a second on 
    Mr. Ribble. Yeah.
    Chairman Ryan. I don't see how you can square Mr. Carney--
is that your new press secretary's name--Mr. Carney, Mr. Lew, 
and the President's comment that we are not adding to the debt. 
Your own Table S-14, the debt goes from $13 trillion to $26 
trillion, debt subject to the limit.
    How can you say you are not adding to debt?
    Secretary Geithner. No, no. The----
    Chairman Ryan. The statement wasn't deficits. It was debt.
    Secretary Geithner. I am just making a point about math and 
    Chairman Ryan. What? I am looking at your own chart.
    Secretary Geithner. If you get the deficit down to that 
range--you need to get it slightly below 3 percent of GDP----
    Mr. Ribble. The deficit?
    Secretary Geithner. The deficit. When you get it to that 
point, if you can hold it at that level, then the debt stops 
growing as a share of the economy. And the question is, is it 
still going to be too big at that point? And it will be--again, 
net of financial assets, the assets we hold, net held by the 
public, will stabilize roughly around 70 percent of GDP.
    That is a level we can sustain, but not--it doesn't hold 
for a long period of time because, again, the health-care costs 
start to eat away at that over a longer period of time. So you 
have to go beyond that.
    Mr. Ribble. Yeah, because it looked like----
    Secretary Geithner. It is a necessary but not sufficient 
condition. That is a way to think about it.
    Mr. Ribble. Yeah. The numbers I saw yesterday added about 
$9 trillion to the debt in the next decade.
    Secretary Geithner. Well, the period between now--you know, 
again, our deficits are unsustainably high. The period before 
you get them down to 3, absolutely, you are adding to debt, 
absolutely. And the debt is growing as a share of the economy. 
That is why you want to move as quickly as you can. You can't 
put it off indefinitely.
    In that period when you are trying to get it from 10 to 3, 
the deficits are so large that they will keep adding to the 
debt, and the debt will be growing as a share of the--more 
rapidly in the economy as a whole, and that is what makes them 
    But once you get it down to 3, you will stabilize them at a 
level that is more acceptable.
    Mr. Ribble. Do the assumptions, though, take into 
consideration that if the economy begins to recover like it is 
proposed, don't interest rates typically go up, as well?
    Secretary Geithner. Well, you are right, the economic 
assumptions that matter most for this are, how fast does the 
economy grow, what happens to interest rates, what happens to 
inflation. And, as I said before, you know, there is no 
certainty around these things. It is a matter of judgment.
    And, ultimately--and this is a great strength of our 
system--CBO's judgments will govern the choices you make. And, 
as the chairman said, when CBO estimates the impact of our 
proposed policies on the economy over time, they are going to 
show slightly higher deficits than we have shown in the budget.
    Mr. Ribble. Just changing gears a little bit, do you know 
what percent of mortgages are currently held by Fannie Mae and 
Freddie Mac, U.S. Household mortgages? Is it in the high 80s or 
90 percent?
    Secretary Geithner. No, it is not that high. If you look 
at, on an ongoing basis, the share of mortgages financed today 
in the market, a very substantial fraction of those are by a 
combination of Fannie, Freddie, FHA, VA. Their combined share 
of new mortgages today is well north of 80 percent.
    Mr. Ribble. Okay, north of 80 percent. Well, what 
assurances can we give the American people that we are not 
going to have another housing crisis as a result of that high 
risk? It is not spread out across the economy anymore; it is 
kind of held in the GSEs.
    Secretary Geithner. Well, two points on that. One is, as we 
said last week, you know, we need to wind them down and bring 
capital back into the mortgage market. And we proposed a series 
of graduated reforms that will make that possible over time. 
And that is absolutely essential to fixing what was broken in 
the system. And we are not prepared to live with the mess that 
helped create this crisis.
    Now, it is important to recognize that you want to do that 
in a way that is careful, because you don't want to be adding 
to mortgage costs, hurting home values as we start to recover. 
So you have to do it carefully.
    But one point about Fannie and Freddie: The losses that 
they face today are the result of the mistakes they made during 
the boom. On an ongoing basis, looking forward, the guarantees 
they are making today are on much more conservative terms--more 
equity in homes, better underwriting standards--and there are 
more expensive guarantee fees. So that is why the independent 
estimates that have looked at this suggest that we are at the 
peak of losses, likely, and those will start to come down and 
we will start to get more of the government's, the taxpayers' 
investments back.
    Mr. Ribble. Okay. Thank you, Mr. Secretary.
    Thank you, Chairman Ryan.
    Mr. Pascrell. Good afternoon, Mr. Secretary.
    I like when we look at alternatives and options. And 
obviously, with all due respect to a gentleman I have great 
respect for, Mr. Ryan, he has presented the alternative and the 
option as he did in 2010 before the election, what his 
alternative was and what kind of an effect it would have on the 
budget. The alternative was very specific. He did deal with the 
entitlements, some of them. In fact, he dematerialized one of 
them. He basically started the process of looking at Medicare, 
and it does not exist.
    Chairman Ryan. Will the gentleman yield for a moment?
    Mr. Pascrell. Sure.
    Chairman Ryan. If you want to talk about budgets, why don't 
you look at our 2009 budget, which was the last budget we as a 
conference actually did, instead of an individual piece of 
legislation that I introduced?
    Mr. Pascrell. May I respond? Because this was presented to 
us in September of 2010 as a legitimate--I thought it was a 
legitimate alternative before we got to the 2011 budget, and 
before we got to the massacre of the CR. So I thought it was a 
legitimate presentation, and I said so at the time, Mr. Ryan. I 
didn't have to wait to look at the results of the election. But 
it is an alternative.
    And I was going to ask the Secretary, with your permission, 
whether or not the Secretary thinks that this option--Mr. 
Ryan's option, the Republican option to what we are talking 
about as a budget and what we are talking about in terms of 
health care in much of this, what does it do to the budget, in 
your eyes?
    Secretary Geithner. Well, in some ways the chairman is best 
positioned to speak to his proposal. But I would make the 
following suggestion, which is that as the chairman of this 
committee, he is going to have a responsibility of putting out 
a 10-year budget resolution in the next several weeks, and that 
is going to have to provide a comprehensive plan for how you 
get these deficits down and what you should do to revenues, 
spending, discretionary, defense, entitlements in that time 
frame. And that will give us a chance to see a different 
strategy for doing deficit reduction, and then you will be able 
to compare two different comprehensive plans. And I guess I 
would reserve judgment to see what he proposes then.
    Mr. Pascrell. But is that the center--the budget proposal, 
whatever that proposal is, it is quite obvious in terms of the 
money we are talking about in this entitlement, it is the 
centerpiece of the entire budget. Would you not agree with 
    Secretary Geithner. In the chairman's road map, as I 
understand it, he does propose very, very, very substantial 
cuts in the basic level of health benefits we provide in 
Medicare and Medicaid and Social Security over a long period of 
time, and the deficit reduction that plan achieves is 
substantial, although, as Mr. Van Hollen says, it comes in over 
decades, not over months or years. It achieves that through, 
again, very substantial reductions in those basic benefits.
    Now, again, the test of credibility should be what 
comprehensive plan achieves the amount of deficit reduction we 
need, and what does it do for growth and for fairness? And 
again, we are going to have a good debate, important debate, 
about what is the best way to get these deficits down over 
    Mr. Pascrell. I think we could both agree with that, right, 
Mr. Chairman?
    Chairman Ryan. Yes. I would only put a caveat: My plan does 
not reduce. It just slows the rate of growth. These benefits 
continue increasing year after year after year throughout the 
    Secretary Geithner. That is an important reminder, because 
the approach we are bringing to the budget on the discretionary 
side is a similar approach. We are saying we want to stop the 
rate of growth, and in real terms what that means is very 
substantial reductions over a period of time, but it happens in 
a way that is gradual.
    Mr. Pascrell. Can I finish with one quick question?
    Chairman Ryan. Yes.
    Mr. Pascrell. Mr. Secretary, can you explain why it is so 
important for the deficit that cuts not be made to CMS in order 
for them to be able to fully implement the health reform law?
    Secretary Geithner. Well, you know the answer to that 
question. If you don't allow these reforms to get traction, to 
be implemented, then you will not get the savings these reforms 
provide. If you delay them by slowing down the pace of it, you 
will delay and reduce the savings. It is just a simple 
    Mr. Pascrell. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Flores.
    Mr. Flores. Thank you, Secretary Geithner, for your 
testimony today. Earlier in the conversation you talked about 
one of the bases in the budget is simplification of corporate 
tax rates, and the reason for that was competitiveness and more 
jobs, lower rate, broader base. That way you create more 
investment and more jobs.
    Now, on the other hand, you say with respect to high-income 
individuals that those same rules don't apply, and so that when 
you raise taxes on the highest tax brackets of Americans, the 
group of people that creates 50 to 60 percent of the small 
business jobs in this country, that it is okay, you can do it 
there and still create jobs. But that you use exactly the 
reverse logic for corporations. Can you explain the obvious 
problem in that logic?
    Secretary Geithner. Absolutely, and, again, I am happy to 
talk about it. It is a very important question, because, again, 
the test of everything we do should be measured through the 
prism of not just how are we reducing deficits, but what are we 
doing to growth, job creation, and investment centers in the 
United States. That is the critical test.
    Now, what we propose in this budget is a series of very 
narrowly targeted, modest changes in taxation that only affect 
2 percent of the richest individuals in the country----
    Mr. Flores. Where 50 percent of the small business jobs are 
    Secretary Geithner [continuing]. And less than 3 percent of 
small businesses. And those small businesses that will be 
affected by this are those structured where their income gets 
treated--they are flow-through entities. Those are 
overwhelmingly businesses that are earning very substantial 
money. The median earnings annually of the businesses affected, 
those 3 percent, are north of $700,000. They are not small 
businesses in that definition. And a substantial number of 
those businesses are what we would call--look more like law 
firms or investment partnerships or hedge funds, not like the 
hardware store on Main Street.
    Now, again, those are the rates that prevailed in the 
1990s, which was the best period for small business growth, job 
creation, investment that we have seen in generations. And so 
we think that at a time when we have to make choices, we don't 
have unlimited resources, that is a prudent and responsible 
step. And again, as we cut spending, we want to make sure that 
those spending reductions go to reduce the deficits, not to 
sustain tax preferences, tax subsidies that are very narrowly 
targeted and don't help growth, that we can't afford.
    Mr. Flores. The next direction I would like to go is talk 
about the President's position on the debt ceiling increase. 
The President has said he wants a clean debt ceiling increase. 
One of the issues he has got is there is a credibility gap. On 
this committee alone on the other side of this room, we have 
got 39 votes against debt ceiling increases. The last time the 
President voted against one, he said there was failure of 
leadership to vote for that ceiling increase.
    Help us out on this side of the aisle. We came in on a 
group of American voters that said, enough is enough. No more 
debt ceiling increases. Help us walk down that path and show 
why it is not a failure of leadership today to vote yes.
    Secretary Geithner. I did not create this system, and you 
did not either, and it is not a way to run a country.
    Mr. Flores. I would concur.
    Secretary Geithner. Congress decides the obligations we 
have as a country. We have to meet those obligations. That is 
our responsibility. But you set the obligations. You set that 
through a process. It is not a terrific process, but you set 
that through a process every year. And the debt we have taken 
on is a function of the choices all of your predecessors made 
over time, Republicans and Democrats over time.
    There is no country on the planet that puts its members 
through this kind of torture. You have to vote occasionally 
around increasing a limit that has already been locked in over 
time. It is not a sensible way to run a country.
    Mr. Flores. I would concur with that.
    Secretary Geithner. Again, I think Mr. Hoyer has spoken to 
this question the best way. Mr. Hoyer said it is a mistake--
when I voted against, it was a mistake. It is not a responsible 
thing to do. And I don't think you want to put the country 
through the position of having to have too much politics around 
something that goes so to the core of our credibility as a 
    And again, I don't envy the position you are in, and I 
wouldn't want to be in your position. There is nothing good to 
say about it except to say that you have to do it. There is no 
    Mr. Flores. We have to vote.
    Chairman Ryan. That is inspiring. Thank you.
    Secretary Geithner. I want to compliment what the chairman 
has said and what your leadership has said. They recognize 
right away that we have obligations as a country, and we don't 
play around with these things. We have to do it. And again, we 
completely recognize and agree with you, and we owe it to the 
citizens of the country that we have demonstrate to them that 
we have to find a way to bring the deficits down over time.
    But we are just making the pragmatic judgment that if you 
make it complicated and hard, something that is already very 
hard, there is greater risk that you are going to mess up the 
expansion because of that. The world looks to us and they say, 
gee, is politics going to overwhelm common sense? Then they are 
going to start to be worried, and you will see rates rise, and 
we cannot afford that.
    Your leadership has done a very good job of saying this, 
that there is no risk that the United States of America will 
not meet its commitments in a timely manner. But again, we 
recognize the position that you are in, and that is why it is 
good for us to find a way to lock in a medium-term plan, 
multiyear plan that brings down the deficits in a way that are 
going to be reasonably good for growth and investments.
    Chairman Ryan. Mr. Honda.
    Mr. Honda. Thank you, Mr. Chairman. And I welcome Secretary 
    As these budget hearings are unfolding against the backdrop 
of the slash-and-burn continuing resolution on the floor, it is 
clear that this is a debate between two competing visions of 
this country: the Democratic vision of helping America's small 
businesses and working families forging a 21st century economy, 
and a Republican vision that is cold-hearted, foolhardy and 
actually dangerous.
    Secretary Geithner, the Republicans are trying to build a 
straw man out of entitlement reform, but we know that for the 
next decade our budget deficits are driven by an endless war in 
Afghanistan and tax breaks for the wealthy.
    Your budget does not continue all of the tax cuts that 
expire at the end of 2012. The budget documents indicate that 
this would save 953 billion compared to extending all of the 
tax cuts, including interest savings. So if you wish to make 
all the tax cuts permanent, you would have to find nearly a 
trillion dollars in additional deficit reduction in order to 
match the deficits in the President's budget. Is that a correct 
    Secretary Geithner. Absolutely. And again, I think it is 
important to recognize that tax cuts are not free. They don't 
pay for themselves. We have to go borrow money to finance them. 
And I know we are having a big debate about what the 
appropriate role of government is. The country is a divided 
country on that question at the moment, but there is no 
credible argument that the role of government is to go out and 
borrow a trillion dollars to finance tax cuts for the top 2 
percent of Americans.
    I think there is no--it is not good for growth. It is not 
necessary for growth. It is deeply irresponsible and will 
deeply magnify the challenge of restoring fiscal 
sustainability. If you don't make those modest reforms in tax 
provisions, very limited targeted reforms, you will have to 
find another trillion dollars in benefit cuts or in spending 
cuts, and that is going to be a very hard thing to do.
    Mr. Honda. Thank you.
    And also the President made it clear that we need to invest 
in education. Today you mentioned three critical areas for 
investment: early childhood, teacher preparation, and financial 
support for higher education. In contrast, Republicans believe 
that cutting our investments in education is critical to 
creating jobs and growing the economy.
    These are vastly different approaches, and only one can be 
correct. Can you explain why the President is investing in 
these three areas of education? And also can you hazard a guess 
as to what the effect the Republican alternative of cutting 
education investments would be on job creation and economic 
    Secretary Geithner. Again, I think there is an 
overwhelmingly strong, compelling case to recognize that we 
have been experiencing a very damaging erosion in the relative 
quality of education in the United States. You talk to any 
company in the United States and ask them how hard it is to 
find the people with the skills they need to be competitive in 
high-end manufacturing, it is overwhelming and compelling. The 
world is not standing still, the world is getting much better 
at these kind of things.
    So if you--remember, businesses have a choice about where 
they build their plant. And if they don't find the talents here 
in the United States, they will have greater incentives to go 
build that plant where they can find the engineers to do that.
    So whether you care about opportunities for all Americans, 
whether you care about our children having a chance to earn a 
better living, whether you care about inequality or the 
competitiveness of the American economy, you have to care about 
reforms with investments that are going to do a better job of 
improving education outcomes in the United States. And I don't 
think that there is any argument that you can help make growth 
stronger if you are cutting into those kinds of investments 
that are so obviously critical to our competitiveness.
    Chairman Ryan. Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary.
    Very briefly, I am one of the new folks, and I can tell you 
that after having been here only 5 weeks, my patience with the 
level of rhetoric, and probably better described as 
doublespeak, is probably already worn out. If you paid 
attention, you heard the ranking member today move very easily 
between the terms ``primary balance'' on one hand and ``full 
balance'' on another, which we both know are entirely different 
things. You heard folks talk about not playing politics with 
the debt ceiling, yet with the exception of Mr. Yarmuth, there 
is not a single person on the other side of the aisle that has 
not voted against one.
    Mr. Van Hollen. Will the gentleman yield?
    Mr. Mulvaney. No, sir. I have only got 4 minutes remaining.
    Mr. Van Hollen. Well, you should look the at record before 
you distort the statement.
    Mr. Mulvaney. And we have a situation where the President 
has done the same thing. Just yesterday this is what he said 
about his budget: What the budget does is put forward some 
tough choices, some significant spending cuts so that by the 
middle of this decade our annual spending will match our 
revenues. We will not be adding more to the national debt. So 
to use a sort of analogy that families are familiar, with we 
are not going to be running up the credit card anymore.
    And that is just not true, is it? That is not accurate.
    Secretary Geithner. No, it is true, because, again, you 
said this in your opening remarks, this is just a matter of 
numbers and math and economics. Not disputable. Primary balance 
is not balance. Balance is balance. Primary balance means you 
are balanced except for interest costs. For a country like 
ours, we need to be at or below 3 percent of GDP to stabilize 
the debt burden and stop it from growing. That is necessary, 
but not sufficient. We get there in this budget over a 3-year 
time frame. It is very hard to do, but it is not as hard as 
doing it in a way that is going to not kill future growth 
prospects for the country.
    And the challenge is a political challenge in trying to 
make sure you bring those deficits down without, again, hurting 
investments that are important to our capacity to grow, and 
doing it in a way that is just and fair to people.
    But I do not do rhetoric----
    Mr. Mulvaney. I appreciate it, and I have not accused you 
of it. But to suggest that we are not running up our credit 
card, we will be adding to our debt as we go on. And I would 
suggest to you, for the American family, that is not balanced.
    Secretary Geithner. Just one clarification, which is we 
said this. Again, we are very clear about this. We want to 
stabilize the level of debt as a share of the economy. The 
economy is going to be growing. So you are right, the debt is 
growing in that case, but what matters economically is it 
stable at a rate that is not going to hurt growth.
    Mr. Mulvaney. Mr. Secretary, I am not here to pick a fight 
with you today, despite what a lot of folks think. I would 
simply put to you that I am not the only person who interprets 
it differently. The IMF has recently released a report that 
concluded that the United States is falling behind on a promise 
it made to other top economic countries to halve its budget 
deficit by 2013.
    But let us get to the bigger issue, which is I have heard 
you today talk about the importance of lowering the tax rate, 
broadening the base. This budget does not do this. I have heard 
you today talk about the importance of entitlement reform, and 
I agree with you on these things, but the budget does not do 
these things.
    Until we can have a debate that is removed from this 
rhetoric, it is going to be very difficult to discuss policy 
issues with you. It is the exact point I made to the OMB 
Director yesterday, that we have to be able to move past the 
rhetoric in order to do what the folks want us to do, which is 
have a discussion on policy.
    Let me ask you a specific question on math. I have heard 
this term ``sustainable deficit.'' I have heard you talk about 
trying to stabilize it at 3 percent of GDP. That 3 percent of 
GDP is not the critical number. It is the ratio that is more 
important, which is the ratio between the size of the debt--
excuse me--the size of the deficit on an annual rate and the 
growth of the GDP.
    I am concerned that over all of this budget, with the 
exception of 2014 and 2015, even though you do manage to get 
the deficit to around 3 percent on an annual basis, that you 
are only at GDP growth of roughly 2.5, 2.6, 2.9; that in every 
year except two, the budget deficit is larger than the growth 
in the overall economy, which to me means that as a percentage 
of our GDP, our deficit will continue to grow. I know I am out 
of time, but I would be curious to know your thoughts on that.
    Secretary Geithner. I am not sure that is right, but I 
don't think it is worth debating, because, as I said, CBO in 
our country makes these judgments for us. They will estimate 
for you what the consequence of our policies will be if they 
were enacted on the economy. You will be able to look at those. 
As I said, they are going to conclude that we need to go 
further. We are going to agree with that.
    But a phrase that I use which is not rhetoric is ``a plan 
beats no plan.'' We lay out a comprehensive plan. You are not 
going to like features of that plan. You might want to go 
further or do it differently. The chairman is going to lay out 
a competing vision for growth and fairness. And we should have 
a debate then on what makes most sense for the country.
    But one thing in our Constitution, the executive has to 
propose, but Congress has to legislate. And in our country now, 
given how divided the country is, it is going to take both 
Houses and both parties to legislate. And it is not something 
we can put off. We have to do it not just because people expect 
it from us, but because our overall confidence in our Nation 
will depend on you all being able to demonstrate that we can 
find a way to bring these down over time. But remember as you 
look at how to cut, make sure you are worried about stuff that 
is important for growth.
    Chairman Ryan. Mr. Ryan.
    Mr. Ryan of Ohio. Thank you, Mr. Chairman.
    Thank you, Mr. Geithner, and I appreciate it. I think it is 
important as we have this long-term discussion as we--a lot of 
times we hear questions asked of you and the last couple of 
visitors we have had here where there has been a complete 
disregard for the economic crisis that we just went through. 
And I think this budget, as much as I don't like a lot of it, 
does make the kind of investments that we need to be 
competitive. That tax rates, as you stated earlier, are not the 
only indicator for growth. It is quality of workforce, it is 
infrastructure, it is all of these other things. And I just 
want to say that I think you guys have done--with a horrible 
economic situation over the past couple of years--have done a 
pretty good job. And I can't imagine having to do this without 
dealing with the politics that the President and you and the 
administration has to consistently deal with.
    And I think if we look back to the number of jobs that were 
being lost in January of--the month the President got sworn in, 
if we look the at direction of the country and look what the 
stimulus bill has done--although it has not--I mean, I am from 
Ohio. Clearly unemployment has not gone down quick enough, but 
we have stabilized. You guys have saved the auto industry. I 
just had some folks in my office from Ford, where they have now 
850 people working in the Parma plant. Lordstown General Motors 
now has a third shift. They are making the Cruze. They are 
selling like hotcakes. That would not have happened if it were 
not for the courage of this administration.
    So talk about rhetoric in Washington, D.C., let us be fair 
to each other who are trying to make some pretty difficult 
decisions here. I just wanted to say that. You know, I wanted 
to get in my questions, but if we are going to change the tone, 
if we are going to have adult conversations that everybody in 
the Capitol wants to start having, I think it starts by 
saying--do you remember when Paulson came here, and everybody 
was running around the Capitol with their hair on fire because 
we were going to go into a global depression in a matter of 
days? And if you contrast that with, I think, some very 
difficult and mature decisions that you guys have made--and I 
am not here to blow smoke, but we have to appreciate the 
difficult decisions that were made under President Bush, then 
President Obama, then the stimulus package and all of these 
other things, and now to propose a budget as we start to turn 
the corner and move in another direction where we made these 
critical investments, continue to say this is a priority for 
our country, I think this is important, and I think you guys 
are showing some leadership in spite of what some of the 
critics are saying.
    Two quick questions. One--and we talked about this a 
million times--China currency. I think it is a major issue. I 
think it could be a major stimulus for the United States if we 
do it. Where are we at with currency? Are you continuing to 
push this? I feel like this could be a major, major stimulus. 
It does not cost us any money.
    Secretary Geithner. It is very important to us and very 
important to a lot of people up here. They are moving, and 
moving very gradually. But what you can see in the exchange 
rate understates the pace of appreciation, because, as you 
know, they have moved about 3.5 percent over the last 6 or 7 
    But inflation in China is much higher than in the United 
States, in part because of their exchange rate policy. What 
that means in real terms is they are moving about 10 percent a 
year at an annual rate. If they continue that, that would make 
a big change, and it is already having a much bigger effect 
than just what that 3.5 percent would imply.
    Businesses have to look forward, and what they see is a 
sustained increase in wages in China, sustained loss in 
competitiveness for China, so they are less likely to build the 
next plant there, more likely to look to other places to buy 
the goods they need and services they need, and that will help 
reinforce this recovery. But they are just at the beginning of 
that process. We want to it continue, and we are going to 
continue to encourage them to move.
    Mr. Ryan of Ohio. Well, we are going to continue to push. I 
want to remind my new Members who are here, we passed that 
China currency bill last year with 380 votes, bipartisan 
support. We need to continue to give you that hammer.
    Please advocate for the health care tax credit as well. A 
lot of these auto jobs and people in Ohio have lost it, and the 
increase up to 80 percent. We need the help of the 
administration for that and the trade adjustment benefits.
    Secretary Geithner. Thank you. Thank you for what you said.
    Chairman Ryan. Mr. Huelscamp.
    Mr. Huelscamp. Thank you, Mr. Chairman.
    Mr. Secretary, it is a pleasure to have you here today.
    I want to make a comment. I made a comment with Mr. Lew 
yesterday, but I just wanted to point out again that the 
President's claim--and you echoed the claim here, Mr. Lew 
echoed the claim as well, that the President has met his pledge 
to cut the deficit in half. And, of course, when he made that 
pledge, he said nothing about tying it to economic growth. It 
was a flat pledge to cut it in half, and it is still $175 
billion short.
    With that said, even with that in mind, and restating that, 
exactly how does the President plan on helping this Congress to 
make sure--for instance, the freeze on discretionary 
nonsecurity spending. He made the comment, the President 
proposes and the Congress disposes, and I have a third grader, 
and that is the way they understand it. That is not the way it 
works. In 1997, President Clinton stepped up when we had the 
debate over the debt ceiling and said, let us talk about 
balanced budgets.
    My question is does the President have any desire to make 
some concrete proposals in this time period other than simply 
presenting this budget, which we all agree is unsustainable? Is 
there anything concrete?
    Secretary Geithner. As part of the debt limit or reducing 
    Mr. Huelscamp. I think when we talk about the debt limit, a 
vote on the debt limit is a referendum on past spending by your 
administration and previous Congresses. That is what we are 
doing. But what about going forward in the future? I understand 
the President would like to not have to face a discussion about 
the future in the debt limit, but, frankly, that is why I think 
the discussion should be----
    Secretary Geithner. We absolutely want to have a discussion 
about the future. Again, the important thing we face is to try 
to figure out how we come together on a credible, comprehensive 
plan to reduce those deficits. That is what our citizens except 
of us. That is what the world is going to require. That is what 
is important to recovery going forward.
    But it is more complicated, of course, than just trying to 
figure out how to get them down. You have to get them down in a 
way that is going to be acceptable, pass the Congress. Of 
course, you are right. We can't leave it to you. We will be an 
active part of trying to shape consensus, and the President 
will help play an active role in that process.
    But again, the budget is the beginning of that process. It 
does not solve all the Nation's problems. There are other 
things we have to do, and we recognize that you are going to 
have different ideas on how to do it. And what we look forward 
to is hearing your alternative suggestions for how we get 
there; how quickly we get there, and how we get there. And then 
we will have two contrasting visions, and we will figure out 
what makes the most sense.
    Mr. Huelscamp. And I appreciate that. I believe your 
timetable is maybe April or May for the debt ceiling vote. But 
we will not anticipate anything from the administration before 
we have that vote as far as serious discussion on the deficits?
    Secretary Geithner. No, we are beginning a serious 
discussion on the deficit right now. That is what the budget 
starts. And again, we laid out a comprehensive plan.
    Mr. Huelscamp. But there is nothing about entitlement 
reform in there.
    Secretary Geithner. Again, I don't think that is really a 
fair way to look at the record of what this President has done. 
The Affordable Care Act, parts of it, delivers very, very 
substantial entitlement reform that delivers very, very 
substantial deficit reduction over time.
    Mr. Huelscamp. I understand that. But you also agree that 
it is unsustainable to have a $768 billion deficit. In 2 years 
we will still be at $768 billion.
    Secretary Geithner. Yes, as I said, we propose to bring it 
down to roughly 3 percent of GDP over a 3- to 5-year period. We 
phase it in because we do not kill growth.
    Mr. Huelscamp. I understand that. I am just about out of 
time. I just want to note that Mr. Obama may not be here in 3 
to 5 years. He promised by the end of his administration. We 
have 2 years, and actually I think we have a couple of months' 
window here, and I encourage the President to step up and 
provide an opportunity before April to provide a real proposal 
to help reach an agreement. But I appreciate it.
    Secretary Geithner. Again, I just want to make this one 
point again. Again, we have got a lot of strengths as a country 
and a lot of strengths in our budget process, although it is 
not working very well for the country right now. But please 
consider this as you consider how to help us fix this problem. 
We need a multiyear plan that brings them down over time that 
you can lock yourself into, because if you do it year by year, 
nobody will have any confidence you will deliver on it. So it 
has to be a multiyear plan. Other countries have found a way to 
do this. We need to find a way, too.
    Mr. Huelscamp. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Yarmuth.
    Mr. Yarmuth. Thank you, Mr. Chairman.
    Mr. Secretary, nice to see you again. Thank you for being 
    I would like to echo Mr. Ryan's and others' comments that I 
think the administration has done a terrific job of trying to 
strike a balance of trying to get our house in order, and also 
respecting the need to make the kind of long-term investments 
that will keep this country competitive a generation and two 
generations down the road.
    Secretary Geithner. You are referring to both Ryans in the 
    Chairman Ryan. I was going to make the same clarification. 
The gentleman from Ohio?
    Mr. Yarmuth. Mr. Ryan from Ohio.
    Obviously not everybody is going to agree with every 
provision in this budget, and there is something that causes me 
a great deal of concern--you and I have had this conversation 
in public before--and that is the repeal of the LIFO accounting 
method, which will have a devastating impact on one of 
Kentucky's primary industries, the bourbon industry.
    In my district alone, Brown-Forman Distillers, which 
employs about 1,300 people in my district, would effectively 
have its taxes raised by hundreds of millions of dollars, they 
estimate, when they have, in fact, relied on an accounting 
method which was approved in 1939. But not only would this 
budget anticipate repealing it prospectively, it recaptures 
their reserve. And, to me, that is like saying you bought a 
house 30 years ago, you took advantage of the mortgage 
deduction, not only do you lose the mortgage deduction going 
forward, you are going to have to pay back all of that money 
that you saved, which seems to me to be incredibly unfair.
    So I would like to get--other than the fact it is a lot of 
money sitting there that you could go after to balance the 
revenue side of the ledger, what is the rationale for that kind 
of essentially retroactive penalty?
    Secretary Geithner. Congressman, let me start by saying I 
understand your concerns, and these changes, like many, are 
painful changes. And we do propose ways to make sure that we 
try to minimize the burden by giving people time to meet that 
change in tax treatment.
    But the basic rationale for this is one of fairness. We 
want to put industries on a level playing field and not favor--
not create favors or create preferences that disadvantage other 
industries in favor of one industry. And it is a complicated 
thing to do. Our Tax Code is ridden with all sorts of other 
examples of unfairnesses like that. We think this just puts 
people on a level playing field. But I understand your 
concerns, and we are happy to talk to you in more detail about 
how to address those. And I understand why it would be a 
challenge for you.
    Mr. Yarmuth. And not just for my industry, but for the wine 
industry. There are many industries that are faced by this 
problem, and particularly the bourbon industry, which the law 
requires them to age their product. In many cases these 
products sit on the shelf 15, 18, 20 years. And just as we 
provide depreciation benefits for some companies that gives 
them an advantage over others, I just want to raise that point.
    Thank you. I look forward to working with you on that.
    I yield back.
    Chairman Ryan. Mr. Rokita. Did he not come first before he 
    All right. Mr. Young.
    Mr. Young. Mr. Secretary, thanks so much for being with us 
here today.
    I wanted to pivot to the housing market. As we know, it has 
been lethargic for some period of time. That, in turn, is 
impacting consumer consumption. It is having some effects on 
our labor market and the ability to match up jobs with a mobile 
    And I did not see it in the budget. I am thoroughly new 
here. So I looked in, and I thought it was a glaring absence. 
And I did some digging here and found out that CBO actually 
scores Fannie Mae and Freddie Mac differently. CBO says that 
Fannie Mae and Freddie Mac are entities of the government 
because they are under the control and ownership of Treasury. 
The President's budget, on the other hand, as you know, says 
Fannie Mae and Freddie Mac are nongovernmental entities, and 
therefore leaves them out of the budget.
    As a Member, my colleagues and I, it is our job to oversee 
such matters. How can Treasury assure us that the President and 
the administration is fully accounting for the risks associated 
with their management of Fannie Mae and Freddie Mac?
    Secretary Geithner. Excellent question. And again, I would 
be happy to talk to you in more detail about this or explain 
exactly how we do this.
    What we do is we show--and CBO does a similar thing--they 
show on a rolling basis the estimate of likely losses over 
time, what the ultimate cost might be to the taxpayer as a 
whole. And we try to explain how we are trying to minimize 
those costs.
    And what FHFA does, which is the responsible authority as 
conservator, is they provide a range of different estimates 
under different scenarios, a stress test, a base case scenario 
about what losses might actually be. And what we lay out for 
people is how, through a strategy of more conservative 
underwriting standards, requiring homeowners to hold more 
equity in their homes, more conservative eligibility 
requirements and higher guarantee fees--we lay out the clean 
economics of why we think the guarantee business going forward 
is much more conservatively managed. And because of this, both 
OMB and CBO show those losses coming down now over time.
    Mr. Young. You are still estimating losses. And why isn't 
your most likely scenario, or an average of certain scenarios, 
included in the budget itself?
    Secretary Geithner. No, we do build into the budget the 
estimated cost of this to the taxpayers over time, and those 
estimates change over time. Again, they are likely to come down 
a little bit. They are still significant, but they will come 
down over time because, again, these companies pay us 
dividends, and that helps offset some of those costs.
    We are very transparent and open about this. We account for 
it in the budget. It is there for everybody to see. And people 
can come to their own estimates what it might cost. But 
ultimately, as in many cases, CBO will determine for you what 
the right way to account for this is.
    Mr. Young. I know the administration is in the process of 
reforming in various ways Fannie and Freddie and its 
operations. I didn't see that included in the budget either.
    Secretary Geithner. We proposed last Friday--before the 
budget came out, we put in a white paper, a comprehensive plan 
for winding them down over time, reforming the market, fixing 
what was broken. Doing that in a gradual way doesn't hurt the 
housing market. And we will begin the process of consultation 
on the Hill about how to translate those reforms into 
legislation that would fix what is broken in the system. But 
the details are not in the budget. We did those separately 
ahead of the budget release.
    Mr. Young. I have got 30 seconds left. Should there be a 
government guarantee in the housing market? And if so, to what 
    Secretary Geithner. A very important question. I think what 
we laid out in this proposal was three different options for 
the future. One option leaves the government's role to a 
limited role through the Federal Housing Administration so that 
low- and moderate-income Americans would have the ability to 
take advantage of a guaranteed mortgage. Two other options 
might complement that, one that would provide you might call it 
emergency assistance in a recession, deployed only in an 
emergency, to help cushion the effects of the housing market 
collapse. The third option would be a much more targeted, 
narrower guarantee that the market would pay for. And if the 
government was exposed to any losses, we have to make those up 
by a fee on the market like we do with deposit insurance.
    We are going to begin debate on those options. Ultimately 
you could choose a mix of those options, but that is a judgment 
that we will have to reach with Congress. And we can go through 
that process carefully because we already have the authority 
now to begin to put in place reforms that will wind down those 
institutions and bring the private markets back into the 
mortgage finance business as we try to figure out what the best 
ultimate choice is about the future.
    Chairman Ryan. Thank you.
    Ms. Kaptur.
    Ms. Kaptur. Thank you very much.
    Welcome, Mr. Secretary.
    As you know, America is enduring a housing crisis of 
monumental proportions, and it is amazing to me that you have 
not addressed that in your testimony today. President Obama did 
not mention it in his State of the Union Address, nor did 
President Bush in the recent book that he published on his 
career here as President.
    Just in 2010, more than 1 million more homes were 
repossessed. Since 2007, 3 million homes were taken back. 
Almost one in five American homes remain under water, worth 
less than what families owe on their mortgage. And the Wall 
Street Journal reported that home prices are declining in all 
28 major metropolitan areas as of the fourth quarter of 2010.
    Back in the 1980s and 1990s, the costs of the savings and 
loan crisis precipitated by reckless bankers were placed on the 
American people; $170 billion placed squarely on the backs of 
our taxpayers to pay for their misdeeds. Now the costs of this 
housing crisis caused by Wall Street abuses through the 
creation of asset-backed securities made a few very, very 
greedy bankers quite wealthy at the expense of millions of 
ordinary citizens and doing great harm to our Republic.
    This cost is also being placed on the backs of U.S. 
taxpayers. Reports show that the true direct costs involve 
trillions of dollars, and according to numbers I have, these 
include 12 Treasury programs thus far have cost taxpayers over 
$700 billion of which the TARP is nearly $380 billion; 24 
Federal Reserve programs have cost $1.738 trillion; and for the 
next 3 years, Treasury has engineered unending support, 
regardless of the dollar amount, to Fannie Mae and Freddie Mac. 
So far we have spent 61 billion on Freddie Mac and 83 billion 
on Fannie Mae.
    All of this debt is being financed by foreign borrowing, 
with China now number one financier to our country, followed by 
Japan and the Middle East oil-exporting countries. But snug up 
against them is the major role of the Cayman Islands. And I 
would like to ask unanimous consent to place in the record a 
report on foreign portfolio holdings of U.S. Securities.
    Chairman Ryan. Without objection.
    [The report, ``Foreign Portfolio Holdings of U.S. 
Securities,'' as of June 30, 2008, may be accessed at the 
following Internet address:]


    Ms. Kaptur. I thank the chairman.
    My question, I have three, is there a transparent--I will 
read all three--is there a transparent list of which Cayman 
Island financial institutions hold the lion's share of the debt 
that they are financing? Number two, who exactly will lose 
money if Freddie and Fannie default on their obligations? And 
number three, how much interest will our government pay this 
year to foreign interests who finance our debt?
    Secretary Geithner. The first I would like to respond in 
    On the second----
    Ms. Kaptur. So you don't know, sir, if there is a 
transparent list of which Cayman Island institutions hold the 
lion's share of U.S. Debt in asset-backed securities? It is 
quite striking when you read the report that almost all of the 
what are called corporate debt securities are held in the 
Cayman Islands, more than any other country in the world. Very 
interesting. Who would that be, from everything that you know 
at the moment?
    Secretary Geithner. I have not seen that report, but I 
would be happy to look at it and happy to respond in writing.
    Ms. Kaptur. It is actually a Department of the Treasury 
report along with the Federal Reserve of New York, which you 
used to chair, sir, I think; am I correct?
    Secretary Geithner. Was the CEO of that. Right.
    Ms. Kaptur. And the Board of Governors of the Federal 
Reserve System.
    Secretary Geithner. I am not sure what you are getting at, 
but I would be happy to respond in writing.
    On your second question, Fannie and Freddie will not 
default on their obligations. It is not going to happen.
    Ms. Kaptur. But if they did, who would lose money?
    Secretary Geithner. I will not contemplate it.
    Ms. Kaptur. But theoretically, who holds the paper?
    Secretary Geithner. The American people would lose on that 
because you would cause devastating damage to the housing 
market, and you would cause a huge increase in the losses for 
the taxpayer that came from the mistakes of entities made 
before the crisis.
    Ms. Kaptur. How much interest will we pay this year for 
foreign interests?
    Secretary Geithner. I will be happy to respond. I don't 
know that number myself.
    Ms. Kaptur. It is sizable, is it not, Mr. Secretary, and it 
is growing?
    Secretary Geithner. Yes, it is, because our deficits are 
very large, which is why we have to bring them down.
    Ms. Kaptur. I think the American people are deeply worried 
that this country is in hock to foreign interests. This Member 
is worried.
    Secretary Geithner. Well, I think what the American people 
should be worried about is that we have unsustainable deficits, 
and we need to bring them down. But you cited a bunch of 
numbers earlier in your remarks that were not correct about our 
financial investments, and I would happy to respond in writing 
on that.
    You raise the S&L crisis. The S&L crisis cost the U.S. 
Taxpayers about 3 percent of GDP. This crisis all in, looking 
at the direct costs of our programs under TARP, the GSEs, 
meaning Fannie and Freddie, what the Fed did, what the FDIC 
did, what the Treasury did directly, will cost almost certainly 
less than 1 percent of GDP. The investments we made in the 
banking sector will earn a substantial positive return to 
taxpayers. The FDIC's programs, the Fed program will earn 
billions and billions of dollars for the taxpayers because they 
were incredibly carefully managed. I would be happy to report 
in detail.
    Ms. Kaptur. I thank you, Mr. Secretary. My time is up, but 
I would just say back in the early 1990s and late 1980s, 
foreign interests were not financing the majority of our debt 
securities, and they are today.
    Chairman Ryan. Thank you.
    Mr. Rokita.
    Mr. Rokita. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for your time today.
    I just went and looked back at the record, asked the staff 
to do it, because I could not believe what I was hearing when 
you said that--when we asked about whether or not the President 
was really getting to entitlement reform as a driver of this 
budget, and you pointed to Obamacare. Mr. Elmendorf, who was 
here, I believe, last week, said, and I quote: Rising health 
costs will put tremendous pressure on the Federal budget during 
the next few decades and beyond. In CBO's judgment, the health 
legislation--he was talking about Obamacare--enacted earlier 
this year does not substantially diminish that pressure.
    Do you want to respond to that?
    Secretary Geithner. Again, I can only quote his estimates, 
and those are the ones that, again, govern what Congress does 
in this area. And what CBO's estimates are, and he reaffirmed 
them, are that the reforms that we refer to as the Affordable 
Care Act will reduce our deficits by $1.23 trillion over the 
next two decades, $230 billion in the next decade, a trillion 
in the subsequent decade, and that is because they 
substantially reduce the rate of growth in health care costs to 
the taxpayer. They still leave us--even with those reforms, 
they still leave us with unsustainable commitments, obligations 
in Medicare, Medicaid and Social Security. So they are a 
beginning, but they are unsustainable----
    Mr. Rokita. Okay. We are talking about the things that are 
going to drive deficit and debt reduction into the future are 
what you just mentioned, and we are not touching it in the 
President's proposed budget.
    Secretary Geithner. No, no, again, that is not quite 
accurate. The first obligation we all have is to make sure over 
the next 5 to 10 years we take an unsustainable deficit that is 
not a result of entitlement commitments and bring that down to 
Earth. That is absolutely essential to maintain confidence in 
our recovery, keep interest rates low.
    Now, you are right, even with the Affordable Care Act, if 
you look at over the next several decades beyond that, we have 
an unsustainable set of obligations, and we need to try to 
build on those reductions to try to do that. But what the 
Affordable Care Act did was the most important cost-saving 
entitlement reform this country has done in decades, not just 
paid for fully, but deficit reducing on a dramatic scale.
    Now, we are happy to work with you on how best to go beyond 
that, and the President laid out some initial suggestions, like 
malpractice reform, to try to do that. But we have to figure 
out how to build on that commitment. But don't look past--I 
know you won't--don't look past the next 5 or 10 years, because 
that still presents an enormous challenge.
    Mr. Rokita. Okay. I will try not to. Thank you for the 
answer, Secretary.
    I still don't--when you talk about covering 40 million more 
people in a government-controlled system and plan, you can't 
tell me that you are actually going to get deficit reduction.
    Secretary Geithner. You don't need to rely on my judgment. 
Use CBO's.
    Mr. Rokita. I did. I just quoted the man.
    Anyway, let me ask unanimous consent to put this chart in 
the record.
    Chairman Ryan. Without objection.
    Mr. Rokita. Thank you.
    You used the word ``torture'' to talk about this debt 
ceiling vote that we are going to have to go through.
    Secretary Geithner. Could I withdraw that?
    Mr. Rokita. I appreciate your empathy. And you are right. 
Politicians before us put us on this path, and here we are 
having to clean up. I take that responsibility. I don't use the 
word ``torture;'' I use the word ``responsibility'' and also 
use the word ``leadership.'' And we will pick up if we have to 
where your budget proposal left off, and then we can work 
together and get some things done. I think that is important.
    But I also don't understand--and let me give you 20 seconds 
to respond--why we couldn't attach--why it is politics to 
attach some things to it that would actually guarantee or help 
cure this situation so it does not have to happen again, 
whether it is balanced budget language, whether it is making 
sure that our interest payments are paid first, and all of 
them; not just the car payment, to your earlier analogy, but 
others? I don't see that as politics. I don't see that as 
irresponsible. I think that is what we ought to do to make sure 
that our kids don't have to pay for this.
    Secretary Geithner. Again, I did not use those terms. I 
will say it this way. As you work with your colleagues on the 
other side of the aisle and work with us to figure out a way to 
put in place a credible deficit-reduction plan that allows us 
to go back to living within our means, make sure you don't call 
into the question the basic obligations of this country. And we 
are just making the pragmatic observation I know your 
leadership shares that this is a really hard thing to do. You 
are finding it really hard to do. People will disagree on the 
right path to do it. Do not complicate it up, because we can't 
afford to take any risk that people call into question our 
commitment to meet our obligations.
    Chairman Ryan. Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Thank you, Mr. Chairman.
    Mr. Secretary, it is great to be with you and see you 
    We have had a number of different individuals testify, 
Chairman Bernanke, CBO Director Elmendorf, Mr. Lew from OMB, 
and each of them affirmed--I have asked each of them this 
question, and I will ask it of you as well--related to the 
draconian cuts proposed in the continuing resolution that we 
are considering right now by the Republicans and the impact 
that they would potentially have on the recovery. Could you 
comment on that? Because each of the previous three individuals 
that I asked all confirmed that that was a significant concern.
    Secretary Geithner. Well, I am a little reluctant to do so 
because we haven't seen how this comes out, and, of course, it 
has not passed the Congress. But as American people observed, 
by putting so much of the burden in cutting discretionary 
spending, which is a small share of our budget, in 1 year, and 
going down deeply into critical services that are important to 
future growth, in my judgment, if Congress were to pass those 
cuts, they would hurt our competitiveness, hurt our growth 
prospects, and in that way in some ways make the long-term 
deficit problem worse.
    Ms. Wasserman Schultz. So it is risky and potentially 
reckless to cut too deeply.
    Secretary Geithner. Again, I would say be careful as you 
cut spending to make sure you are reducing deficits, too, but 
focus on doing it in a way that is not going to hurt our future 
growth prospects.
    Ms. Wasserman Schultz. Thank you.
    Secretary Geithner. Again, can I just say one thing? These 
things that we all care about for competitiveness are things we 
can afford. You know, if you look at the costs of the reforms 
for the Department of Education, they are not expensive for a 
country like the United States. The suggestions we are making 
for incentives in innovation are not beyond our means as a 
country. And if you try to balance the budget on the strength 
of deep cuts on that relatively small share of the budget and 
not bring a comprehensive plan that helps future growth, then 
you are going to hurt growth.
    Ms. Wasserman Schultz. Just an extension of what Mr. Rokita 
referred to, would you say that it is not responsible for us to 
hold the lifting of the debt ceiling hostage with items that 
might warrant debate and that we might ultimately be able to 
find some common ground on, but that irresponsibly would tie to 
the lifting of the debt ceiling?
    Secretary Geithner. I would, of course, say that. But every 
predecessor who has had my job would say that, as would every 
President faced with this basic choice. And you would expect us 
to say that because, again, the stakes are too high. We can't 
afford to take any risk with a recovery that is still in the 
early stage after a recession that was traumatic. We are still 
living with 9 percent unemployment, and we can't afford to take 
any risk of jeopardizing the process of repairing that damage.
    Ms. Wasserman Schultz. Thank you.
    And just in the last minute, I am really pleased to see 
that the President has made a commitment to making sure that 
intellectual property rights are preserved in the budget, and 
glad to see that he has made a commitment to that. I think we 
all understand the obvious benefits to that.
    But on closing tax loopholes specifically, we know that in 
terms of winning the future and the concepts that the President 
has pushed in allowing us to outinnovate and outeducate and 
beat our global competitors, what does the President's budget 
do specifically to close those corporate loopholes and shut off 
incentives to ship American jobs overseas?
    Secretary Geithner. We proposed a series of reforms to 
reduce both the opportunities and the incentives in the current 
Tax Code to shift income to low-tax jurisdictions and to shift 
investment outside the United States. And we also propose, 
though, some very positive incentives for investment in this 
country. We propose to make permanent an expanded R&E tax 
credit. We propose very substantial cuts for small business, 
small businesses themselves. And if you look the at the 
combined impact of the reforms we are proposing, I think they 
would be very good for growth and very good for investment in 
the country.
    Chairman Ryan. Mr. Woodall.
    Mr. Woodall. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here. I am the newest 
member to this subcommittee and have a steep learning curve as 
I have been trying to pore through the numbers in the 
President's budget and listening to what he has said when he it 
out talking about reducing the deficit and attacking the debt. 
Can you tell me in simple terms, true-or-false terms, this 
budget never, ever, ever reduces the debt; is that right?
    Secretary Geithner. That is correct. It does not go far 
enough to bring down the debt, not just as a share of the 
economy overall, you are right.
    Mr. Woodall. It does not bring down the debt at all.
    You have said a lot, which I very much appreciated, about 
preferences for industries. It started with Mr. Blumenauer, and 
Ms. Wasserman Schultz followed up on that. You said it is not 
good policy, that it is not fair, that preferences for even Mr. 
Yarmuth's folks were bad policy. But as I read your written 
testimony, you go right into we are going to start with revenue 
provisions that promote investment in clean energy; that we are 
going to go on and promote--to make revenue changes that make 
investments in manufacturing facilities with energy-efficient 
commercial buildings and plug-in vehicles, and on and on and 
    Can you tell me why it is that tax preferences for the 
bourbon industry are bad and for the oil industry are bad, but 
tax preferences for these other industries are good and 
    Secretary Geithner. Absolutely. Fair point. We do include 
in the budget a series of targeted tax incentives that go to 
support investments in clean energy. You know why we are doing 
that, because we think it is important for the country as a 
whole to move to less carbon-intensive energy as a whole.
    Mr. Woodall. I guess my question, Mr. Secretary, would be 
why you? If we want wanted to do it on the spending side of the 
ledger, I think that is absolutely right. But you have said 
over and over again that your job is to collect revenue. I will 
associate myself with Mr. Blumenauer's comments. It is not the 
IRS agent's fault; it is our fault. Here we have an 
opportunity, what seems like agreement on both sides of aisle, 
to move to lower rates, a simpler system, and yet even though 
we agree on that, here we are again using your agency, using 
your Department to continue to create these market distortions. 
If we want to distort the market, why don't we do it on the 
spending side of the ledger instead?
    Secretary Geithner. You and I can agree on that more than 
you think. And as I said, we are in favor of trying to find a 
basis for doing comprehensive tax reform that will lower the 
rate and broaden the base. And where we preserve incentives for 
investment, we want to make sure they meet a very, very high 
bar; very powerful, very strong impact on investment incentives 
that we can all justify as a whole. We won't be perfect on 
cleaning them up completely, but we think it is worth doing.
    And you are right to say that in this budget we are 
proposing a set of changes built on the current tax system on 
the corporate side that we think shifts the incentives in a 
positive direction for investment. But we also say that if we 
can, we would like to move to comprehensive reform that would 
clean it up more dramatically.
    Mr. Woodall. Would you agree with me that businesses don't 
pay taxes, that their consumers and their shareholders pay 
those taxes, but that there is no secret drawer at the business 
to pay those taxes?
    Secretary Geithner. I am not an economist, but all 
economists would agree with you that those costs are borne by a 
mix of shareholders, employees, managers and customers.
    Mr. Woodall. What is the downside, then? We talk about 
reducing the corporate tax rate and simplifying the compliance 
process. What is the downside of eliminating the corporate tax 
rate altogether so that we are certain that we are a magnet for 
jobs, so that we are absolutely certain that we are not moving 
folks overseas, and since we are absolutely certain that the 
only taxpayers in the world are consumers, employees and 
    Secretary Geithner. Sounds to me like you could do fine 
explaining the arguments against doing that.
    Mr. Woodall. I just need you on my team, Mr. Secretary.
    Secretary Geithner. I will just make a pragmatic argument 
that if you do that, you are asking individuals to directly 
bear a much higher tax burden, and I think you are going to 
find that untenable politically.
    Mr. Woodall. I will have to bring you down to the Seventh 
District of Georgia, where folks are pleased to shoulder that 
personal responsibility.
    Chairman Ryan. Mr. Lankford.
    Mr. Lankford. I want to continue on this conversation on 
the corporate tax side as well. You mentioned earlier in your 
testimony in the conversation about territorial or global and 
how we want to land on that. And you mentioned you were looking 
for those ideas on how we handle that, and do we set our 
criteria and expectations on that.
    What country do you look at that is doing global taxation 
that you say that is a good model in how they transitioned and 
what they have done? Is there another country out there that 
you say, gosh, they do global taxation well?
    Secretary Geithner. Excellent question, but I don't see 
anything out there yet that we can fit to our particular 
circumstance as a country. You know, we are a little special in 
many ways. The countries in Europe are not really a good model.
    Mr. Lankford. Like to keep it that way.
    Secretary Geithner. Yes, we want to keep it that way, too. 
We would be happy to talk to you about it in more detail. We 
are beginning a very careful process of consultation to look at 
all alternatives out there, but, again, we want, like I think 
you would want, to make sure that we are not eroding the tax 
base substantially, and we want to create more incentives, more 
opportunities to move that stuff outside of the United States.
    Mr. Lankford. As a general principle, though, and following 
up on Mr. Woodall's comments as well, as a general principle, 
if you subsidize something, you get more of it; if you tax 
something, you get less of it. Do you generally assume that?
    Secretary Geithner. I am not an economist, but I think most 
economists would agree with you.
    Mr. Lankford. The issue then comes back to the energy side. 
Obviously we are trying to subsidize heavily one side of it, 
this clean energy side, and traditional energy is about to get 
whacked based on the President's proposal on it.
    Secretary Geithner. ``Whacked'' would be overstating it, 
but I would say the existing preference is somewhat diminished. 
Only some of them----
    Mr. Lankford. Well, they would definitely have a pretty 
hard hit on it, on how they are going to handle it. So that 
would decrease our energy supply there to try to increase it on 
another side of energy. But it is not actually there.
    My question is based on your statement you said earlier. 
You didn't feel like raising taxes on traditional energy 
sources. Your statement was it would have no effect on price. 
And I am kind of astounded by that to say, well, add a tax 
burden on them, which will cause them to drill less and to 
research less for things like IDCs and such. And so supply then 
goes down, your tax amount goes up, and you are saying that it 
will have no effect on price. It is almost astounding to me, I 
    Secretary Geithner. Don't rely on my judgment. I am just 
saying economists would say that these prices in a market like 
oil are set by the global market, and modest changes in the tax 
preferences for where some production happens won't affect 
those prices.
    Mr. Lankford. Well, I would say in the same vein, if that 
would have no effect on the price on that, then what if we stop 
subsidizing ethanol as much, for instance; would that have no 
price effect on ethanol, you think, as well?
    Secretary Geithner. You know, I am a little reluctant to 
speak to that because that is a little different market in 
terms of size in that context.
    Mr. Lankford. I am just saying on the energy side, we can't 
say that we subsidize things and we get more of it, and we tax 
it and we get less of it. The exception to that is in energy 
that we can kind of switch it. Because I get this feeling from 
reading speeches from the Carter administration, they tried 
this same experiment. I am sure you are very aware of that.
    Jimmy Carter made the statement that by the year 2000, 20 
percent of our electricity would be produced be solar power. 
And there was a heavy push towards all the clean-energy 
options, with the exception of coal. He was a big fan of coal. 
But then it didn't occur. We dumped a lot of money in that, and 
it didn't occur. You can't just flip it on and say, we are 
going to do that as a country.
    Let me just make a couple of quick statements just as 
observations on it. I am also a new Member in this, and coming 
from central Oklahoma, some of the words and the phrases that 
are coming out don't ring true in just normal Americans that we 
are interacting with. The statements that you made earlier 
like, we are worried about more generous estate tax rates, 
gives the impression that the Federal Government owns the 
property of people who die, and we get to choose whether they 
are going to have more generous rates or not, which they have 
now, and whether they are going to have less rates. You 
mentioned fortunate Americans. The primary balance we have 
already talked about. It is a great frustration. Sustainable 
    I just don't hear anyone that I am interacting with saying, 
you know, if we just get to $26 trillion in debt, I think we 
will be fine. I just don't hear anyone saying that except for 
the administration. The administration continues to say, we 
will have sustainable debt, we will have $26 trillion in debt, 
and we will be just fine.
    Secretary Geithner. You will never, never, ever hear me say 
    Mr. Lankford. Well, that is what is coming across in our 
budget, and we have got to serious about that. My fear is right 
now we are more worried about balancing the budget and what 
effect that will have on our economy than we are about dealing 
with our debt. And I just think more people are more worried 
about--let us get back to balance.
    Chairman Ryan. Mr. Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary. I have enjoyed our conversation today.
    Did you have any involvement in putting the budget together 
for the President?
    Secretary Geithner. I did.
    Mr. Stutzman. Okay. I guess what I am curious is, I would 
like to go to--off of page 202 and the economic assumptions in 
growth, especially in particular GDP; 6.1 percent is the high, 
and the low that I see there outside of 2010 is 4.0 in 2011, 
and I think I heard you say earlier that average growth of GDP 
is around 2 to 3 percent.
    Secretary Geithner. I think you are quoting nominal GDP 
rates, not real GDP rates.
    Mr. Stutzman. Even with real GDP rates, they are still very 
optimistic in the short--right after 2013--or right in 2013, 
2014, what gives you the idea that we are going to see that 
type of growth? Because when I mention that to folks back home, 
they are trying to figure out what to buy.
    Secretary Geithner. Again, I am repeating a conversation we 
have already had at some length.
    Mr. Stutzman. I am sorry. I came in a little late.
    Secretary Geithner. It is an important question. Again, you 
want to have realistic, conservative assumptions as you make 
budgets. In the end, of course, it is CBO's estimates that will 
govern what you do and how that affects--how we estimate the 
cost of these policies in the economy long term.
    If you look at the full mix of these assumptions, I think 
they are actually reasonably conservative. Again, the growth 
rates we assume in the budget over time are lower, materially 
lower, than the average of past expansions. So they are 
conservative in that sense. The fiscal year 2011 budget 
estimate is substantially above CBO's estimate because it is 
very conservatively estimated. It will much--it will be lower 
than that almost certainly. But again, the way our system 
works, CBO will look at those independently, and you will be 
able to look at their judgments, too, about what is a prudent 
set of assumptions.
    Mr. Stutzman. But why the big spike in 2013, 2014, and 
everything levels back off to--you have 2.9, 2.6 and then 2.5 
the remaining 3 years.
    Secretary Geithner. The way I think economists think about 
how recoveries happen is that in the early stages of recovery, 
you should grow above what they call the trend rate of growth. 
And ultimately you return to the trend rate of growth. Again, 
for our economy, trend growth is like 2\1/2\ percent of GDP in 
real terms over time. But as you are digging out of a hole like 
this, you put more people back to work, you start to absorb 
that excess capacity in factories across the country, you will 
grow more rapidly in the initial stages. But all economists who 
look at our economy now would agree that growth would be faster 
in the near term than it will be if you look out 5 to 10 years.
    Mr. Stutzman. But my fear is if we are going to continue to 
grow the national debt--I mean, we are looking at interest in 
2010 of 196 billion, expenditure to the Federal Government. In 
2021, 844 billion in interest payments is what I see on page 
176. When are we going to give people confidence that they can 
start investing money here, because a deficit just may take--
potentially a tax increase is coming. I am going to take my 
money, and I am going to invest it somewhere else where the tax 
climate is better, where I see a government that is under 
    Secretary Geithner. Again, this is not rocket science. You 
are exactly right. What you need to give the American people is 
clarity of what it is going to take, what is going to happen to 
taxes and spending that bring those deficits down, and we can 
afford them over time. That is what our responsibility is. And 
it is very important to confidence that you start to put in 
place those sets of changes and let that happen. And again, you 
need to lock them in over time so people don't think you are 
going to change every year.
    Mr. Stutzman. But do you really believe this budget--I 
mean, we have talked about it earlier. Some of the folks said 
that, you know, it is Congress that passes legislation, and I 
agree with that. But if Congress passed this bill, this budget, 
I mean, to me, I think it is irresponsible. And to send a 
message to the American economy that we are going to continue 
to grow deficits, we are going to continue to grow--not 
deficits--grow debt, where is the confidence going to come out 
of this budget?
    Secretary Geithner. Let me take the slightly more 
optimistic side of it. If Congress were to legislate a set of 
tax polices and expenditure policies that achieved this level 
of deficit reduction, then two things would happen. One is the 
world would be much more confident than they are today that we 
have the political will to act, to live within our means. But 
people would also say that that is a pretty good step, pretty 
good start, but ultimately we are going to have to do better 
than that longer term.
    But if you did that--I don't mean just a precise mix, 
because we are not suggesting you legislate exactly this mix of 
things, but if you legislated that deficit reduction, and it 
was clearly committed and locked in over that period of time, 
that would be an enormously positive first step towards 
restoring people's confidence that this will work.
    Mr. Stutzman. I appreciate that, and I am looking forward 
to taking action with that. Thank you.
    Chairman Ryan. Obviously, we dramatically disagree with 
your interpretation of your budget, but we will leave it at 
    One final housekeeping detail. I ask unanimous consent that 
Members be allowed 7 days in which to file questions for the 
record. So ordered.
    [The information follows:]

         Questions Submitted for the Record and Their Responses

                  questions submitted by chairman ryan
    1. The President's Budget requests a 34% increase for U.S. 
contributions to the multilateral development banks reflecting recently 
concluded negotiations for the replenishment of the concessional 
lending facilities and general capital increases of several 
institutions. These replenishments and capital increases were 
negotiated by the Treasury Department while the U.S. was facing 
deficits in excess of $1 trillion each year.
    For each institution for which replenishment is requested, please 
provide a table showing how much the U.S. pledged in the previous 
replenishment and how much the Treasury has pledged in this 
           u.s. pledges in new replenishments (vs. previous)
    International Development Association: $4,075.5m ($3,705m)
    African Development Fund: $585m ($468.05m)
    Ongoing Replenishments (vs. Previous):
    Asian Development Fund: $461m ($461m)
    International Fund for Agricultural Development $30m ($18m)
    Multilateral Investment Fund: $150m (This is the first 
replenishment of the MIF.)
    Global Environment Facility: $575m ($320m)

    2. The U.S. has for over a decade provided less actual funding than 
the Treasury Department had pledged in replenishment negotiations. Was 
this historical pattern considered during the most recent round of 
negotiations and what steps could be taken to better align the Treasury 
Department's pledges with the amounts likely to be appropriated by 

    As we approach any new pledging at the multilateral development 
banks, Treasury is mindful of only making pledges where we can deliver. 
As a result, we work closely with Congressional staff during the 
negotiation process to get their input and feedback. This process 
directly influenced what amounts we were willing to pledge in the 
replenishment negotiations last year.

    3. For each institution for which a capital increase is request, 
would the U.S. voting share decline (and by how much) if the U.S. share 
of the capital increase is not fully funded?

    The decline in the U.S.'s relative shareholding would depend on the 
extent to which U.S underfunds the pledge to purchase shares, the rate 
at which other countries purchase their shares and the governing rules 
of the institutions themselves. However the following consequences are 
     International Bank for Reconstruction and Development GCI 
and Selective Capital Increase (SCI): If the United States were to make 
no payment towards the IBRD's GCI and SCI, and if other shareholders 
were to obtain the shares that had been allocated to the United States 
for these capital increases, U.S. shareholding would fall from 16.8 
percent to 11.6 percent. With this decline, the United States would no 
longer be able to veto changes to the Bank's Articles of Agreement. 
This could affect issues such as the role of the President of the World 
Bank, entities eligible to receive loans from the Bank, membership, and 
role and responsibilities of the Board of Executive Directors.
     African Development Bank GCI: The United States' present 
voting power in the AfDB is 6.616 percent. The United States is the 
second largest AfDB shareholder (after Nigeria), the largest non-
regional shareholder, and the only member to have a single-country 
constituency in the Executive Board. If the United States were to make 
no payments to the AfDB's sixth general capital increase (GCI-6), U.S. 
voting power would decline to 2.197 percent once all GCI-6 shares were 
fully subscribed. This assumes other shareholders (e.g. China, South 
Africa) would take up the shares not subscribed by the United States. 
This could put the ability of the U.S. to hold a single country chair 
in serious jeopardy--the U.S. has never shared a chair with any country 
at any MDB and it is unclear whether or how the voting mandates could 
be implemented in such a case. If the United States fails to pay its 
first installment of GCI-6 by mid-June 2012, when the grace period for 
payment of the first installment expires, the United States would 
forfeit its right to the full amount of shares designated to it under 
GCI-6, and these shares would be made available for subscription to 
other shareholders.
     Asian Development Bank GCI (First year in US budget 
request = FY2011): If the United States were to make no payments to the 
AsDB's GCI, U.S. shareholding would decline to 5.19% from the normal 
shareholding of 15.57%. A normal voting power under full GCI payment 
would put the U.S. at parity with Japan for leadership of the 
institution and retain the joint veto with Japan. However, because we 
have not yet made our payments, the United States has fallen to number 
7 in shareholding at the AsDB, behind China, India, and Indonesia. 
Japan, Canada and Australia are also ahead of the U.S. because those 
countries have provided their entire capital contribution.
     Inter-American Development Bank General Capital Increase 
(GCI): Under the Bank's Articles of Agreement, no increase in the 
subscription of any member to capital stock can become effective if it 
would reduce the voting power of the largest member (the United States) 
to below 30 percent. Given that the current share of the United States 
is just above 30 percent, if the United States fails to provide its 
subscription, the GCI cannot go forward. The outcome would be that the 
capital base of the IDB would stay at $101 billion instead of 
increasing to $171 billion. Given that the IDB is the largest source of 
development finance in the Western Hemisphere, this would have 
considerable economic and political repercussions.
                    questions submitted by mr. honda
    1. Thank you Secretary Geithner. As these budget hearings unfold 
against the backdrop of the slash and burn Continuing Resolution being 
debated on the floor, it has become clear that this is a debate between 
two competing visions of the country. The Democratic vision of helping 
America's small businesses and working families forge a 21st century 
economy; and a Republican vision that is coldhearted, foolhardy and 
    Secretary Geithner, Republicans are trying to build a straw man out 
of entitlement reform. But we know that for the next decade our budget 
deficits are driven by an endless war in Afghanistan and tax breaks for 
the wealthy.
    Your budget does not continue all of the tax cuts that expire at 
the end of 2012. The budget documents indicate that this would save 
$953 billion compared to extending all of the tax cuts, including 
interest savings. So if you wish to make all of the tax cuts permanent, 
you would have to find nearly $1 trillion in additional deficit 
reduction in order to match the deficits in the President's budget. Is 
that correct?

    Yes, that statement is correct. The figures you cite refer to the 
cost over the ten year budget window of permanently extending the 2001 
and 2003 income tax cuts for high-income taxpayers (those married 
filers with incomes over $250,000 and single taxpayers with incomes 
over $200,000) and the estate tax cut enacted by the Tax Relief, 
Unemployment Insurance Reauthorization, and Job Creation Act of 2010, 
which expire at the end of 2012. The total amount is comprised of $709 
billion from extending the income tax cuts for high-income families, 
$98 billion from extending the estate tax cut, and $147 billion of debt 
service associated with the foregone revenue.

    2. The President has made it clear that we need to invest in 
education. Today you mentioned three critical areas for investment: 
early childhood, teacher preparation, and financial support for higher 
education. In contrast, Republicans believe that cutting our 
investments in education is critical to creating jobs and growing the 
economy. These are vastly different approaches and only one can be 
    Can you explain why the President is investing in these three areas 
of education--and also can you hazard a guess as to what the effect of 
the Republican alternative of cutting education investments would be on 
job creation and economic growth?

    It is crucially important to invest in education. As the President 
noted in his State of the Union address, America has fallen to ninth in 
the proportion of young people with a college degree. Having an 
educated and skilled workforce is critical to competing in the global 
economy--workers with a college education not only earn higher wages 
for themselves, but also increase the productivity of those who work 
with them and of the economy overall.
    The President's goal is to have the highest proportion of college 
graduates in the world by 2020, and as such, the Budget proposes 
targeted investments that address every stage of a child's education to 
help us reach that goal. Providing children with high-quality early 
learning programs before gaps in learning develop can reduce the need 
for more costly and difficult interventions later on. Research suggests 
that high-quality early learning programs can have a significant impact 
on participant outcomes as adults, including on earnings.
                   questions submitted by mr. calvert
    One area that I believe has a major impact on our nation's economic 
recovery is the stability of the commercial real estate industry. A 
healthy commercial real estate market provides more than 9 million jobs 
and generates billions of dollars in federal, state and local tax 
revenue. However our commercial real estate market continues to suffer 
from reduced operating income, property values (down 43% across the 
board), and equity and this has a direct and lasting impact on the 
stability of tens of thousands of small businesses and small and mid-
size banks.
    An estimated $2.2 trillion worth of commercial real estate loans 
will be coming due over the next decade, with a very limited capacity 
to refinance. This has a potential to wreak havoc on the broader 
economy. As we've all seen falling commercial real estate values have 
forced many small regional and community banks to take steep write-
downs, which has resulted in bank failures and a reduction in credit.
    1. What specific policy prescriptions do you think are necessary to 
reverse this trend?
    2. In terms of the banks, what can be done to minimize these write-
downs and failures, without further constraining commercial real estate 
    3. Is there something the U.S. Treasury can do to help mitigate 
this problem?

    We share your concerns regarding commercial real estate, small 
businesses, small and mid-size banks, and, more generally, the broader 
economy. In order to promote robust small business activity, the 
Administration and Treasury have taken various measures to address the 
health of commercial real estate market, increase liquidity for small 
and mid-sized banks and incentivize small businesses to drive the 
economy forward.
    To promote liquidity in the securitized commercial real estate 
sector, the Department of the Treasury launched, or partnered to 
launch, two liquidity initiatives, the Term Asset-Backed Securities 
Loan Facility (TALF), a joint Treasury and Federal Reserve program, and 
the Public Private Investment Program (PPIP). Both TALF and PPIP have 
played a significant role in supporting market functioning, 
facilitating price discovery and helping restart this $600+ billion 
    Since the announcement of PPIP in March 2009, prices for legacy 
CMBS securities eligible for PPIP have appreciated between 70% and 300% 
with many of these securities now trading at or above par value. With 
increased liquidity and tightening of spreads, holders of these 
securities, such as banks, have capital available from which new 
lending activities can be supported.
    In addition, there have been 19 new CMBS transactions representing 
more than $16 billion in new issuance following an 18-month period in 
which there was no new issuance. Although smaller than the levels of 
annual issuance prior to the onset of the financial crisis, this level 
of new issuance represents a meaningful step in the recovery of the 
markets for CMBS and commercial real estate.
    In addition to TALF and PPIP, in September of 2010, the President 
signed into law the Small Business Jobs Act. The Small Business Jobs 
Act established the Small Business Lending Fund (SBLF), an initiative 
that encourages lending to small businesses by providing capital to 
community banks and other eligible institutions. The SBLF incentivizes 
financial institutions to provide credit to small businesses by tying 
the cost of capital to the volume growth of the institutions' small 
business lending portfolio helping to get small businesses off the 
sidelines. To date, over 600 banks have applied to participate in the 
program. In addition to the SBLF, the Small Business Jobs Act includes 
eight small business tax cuts and extends Recovery Act provisions 
temporarily eliminating SBA fees. The Act also established the State 
Small Business Credit Initiative, which will provide $1.5 Billion to 
cash-strapped states to support innovative credit programs, supporting 
the creation of $10 of new private sector lending for every $1 of 
federal funding. These measures encourage small business hiring and 
investment and help creditworthy businesses secure the capital they 
need to restore our economic prosperity.

    As you know, I remain concerned about the economic risks posed by 
commercial real estate and am curious about what your thoughts are on 
the need to restructure some $1.5 trillion of commercial real estate 
debt that remains on bank balance sheets.
    Credit availability in the commercial real estate market today is 
scarce, and we need to be on the offensive to aid this sector. It may 
be that one of the factors inhibiting foreign capital coming into this 
sector is the Foreign Investment in Real Property Act (FIRPTA), a law 
that penalizes foreign investment in real property versus other asset 
    In 2007, the Treasury made a ruling to tax the proceeds of 
liquidating real estate investment trusts (REITs) as the sale of real 
property rather than as stock, thus subjecting them to FIRPTA. This 
ruling helped dry up foreign investment in real property in the US.
    1. Wouldn't this be a relatively cost-effective way to help fill 
the estimated $1 trillion equity gap in commercial real estate?
    2. Do you have any plans to reexamine the 2007-55 ruling?

    The Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, 
generally subjects foreign investors' gains from the sale of U.S. real 
property to the same net-basis taxation that is imposed on U.S. 
taxpayers. IRS Notice 2007-55 clarifies that foreign investment in U.S. 
real property that would otherwise be subject to tax under FIRPTA 
cannot avoid tax simply by placing the U.S. real property in a REIT.
    We do not see a sound policy reason to favor investment through 
REITs over direct investment in U.S. real property or investment 
through other structures. In addition, we are not aware of any evidence 
that suggests that changing the result of IRS Notice 2007-55 would 
significantly increase foreign investment in U.S. real property. In 
fact, in the years since the issuance of Notice 2007-55, foreign 
investment has continued to increase as a percentage of U.S. net real 
estate investments.
                   questions submitted by ms. kaptur
    1. The cost of this housing crisis caused by Wall Street abuses 
through the creation of asset-backed securities made a few very greedy 
bankers quite wealthy at the expense of millions of ordinary citizens 
and doing great harm to our republic.
    This cost is also being placed on the backs of U.S. taxpayers. 
Reports show that the true direct costs involve trillions of dollars, 
and according to numbers I have, these include 12 Treasury programs 
thus far have cost taxpayers over $700 billion, of which the TARP is 
merely $380 billion; 24 Federal Reserve programs have cost $1.738 
trillion. And for the next three years, Treasury has engineered 
unending support, regardless of the dollar amount, to Fannie Mae and 
Freddie Mac. So far, we've spent $61 billion on Freddie Mac and $83 
billion on Fannie Mae.
    All this debt is being financed by foreign borrowing with China now 
number one financier to our country, followed by Japan and the Middle 
East oil exporting countries. But snug up against them is the major 
role of the Cayman Islands, and I would like to ask unanimous consent 
to place in the record a report on foreign portfolio holdings of U.S. 
    Is there a transparent list of which Cayman Island financial 
institutions hold the lion's share of the debt that they are financing?

    The Department of the Treasury's reporting systems on foreign 
portfolio investment in the United States collects information annually 
on the holdings of U.S. securities held in the aggregate by all 
residents, both public and private, in a foreign country. The 
information is provided to Treasury by U.S.-resident custodians who 
hold in custody U.S. securities for the account of foreign residents. 
The information provided is the amount, in aggregate, for a country. It 
does not identify holdings by specific foreign entities in that 
country. This basic data is supplemented by data on net purchases, 
again collected on an aggregate basis, to make estimates of monthly 
holdings of U.S. Treasury securities.
    As of December 2010, Treasury estimates that total holdings of U.S. 
Treasury securities by residents of Caribbean Banking Centers were 
$168.3 billion, or 1.2 percent of total Treasuries outstanding. Total 
holdings attributable to the Cayman Islands were $92.3 billion, or 0.7 
percent of total Treasuries.

    2. How much interest will our government pay this year to foreign 
interests who finance our debt?

    Approximately half of the projected $250 billion in net interest 
payments on the debt for 2011 will be paid to foreign holders of 
Treasury securities.

    Chairman Ryan. We have kept you a while, and we started 
late, so I thank you for your indulgence, Secretary. This 
hearing is adjourned.
    [Whereupon, at 4:55 p.m., the committee was adjourned.]