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I would just make this additional point. At least in my campaign in the year 2000, and almost every other candidate running for office in the year 2000, a promise was made to the American people that we were not going to invade the Social Security or the Medicare surplus. It was put in terms that we will fence it off, we will wall it off, we will put up a firewall-we will not invade that surplus. And why? Why was there a consequence? Well, we said we do not want to fool with the Social Security surplus because that ought to be saved for Social Security and that if you do not spend the Social Security surplus, the result is that it is going to pay down the national debt.

Mr. Chairman, the figures that you have come up with over a 10year period starting in 2002 to 2011 say that just the Social Security surplus, you are going to invade its trust fund moneys to the tune of $437 billion. And when you look at both of the Social Security and Medicare Trust Funds, you are going to invade it to the tune of almost three-quarters of a trillion dollars.

Now, that is breaking faith with what we said-not only to protect Social Security, but what that also is saying is that we are paying down the national debt under these projections by not doing any more spending, not even taking into account the 10th year of the tax cut that is going to have to be reenacted, we are still going to invade those surpluses and therefore not pay down the national debt to the tune of three-quarters of a trillion dollars over the 10year period.

Chairman CONRAD. Would the Senator yield?

Senator NELSON. Of course.

-even

Chairman CONRAD. Actually, the most recent numbers based on the numbers we have gotten here today are even worseworse because what we see now is that you will be taking that amount just out of Social Security and on top of that, another $380 billion of Medicare Trust Fund money. So the total now is $1.1 trillion taken from the trust funds of Social Security and Medicare to pay for the President's tax cut and to pay for other expenses of the Federal Government. So trust fund moneys are being used for purposes for which they were not intended and for which everybody, including the President, pledged not to do

Senator NELSON. Mr. Chairman, as a country lawyer, I would say I rest my case. We are going to continue this discussion quite a bit, but the numbers here are not only damaging, they are damning, from the testimony that came out of this committee year ago. Chairman CONRAD. I thank the Senator.

Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

Director Crippen, a year ago, what were the surplus or deficit figures you projected for the 10-year period?

Mr. CRIPPEN. For the 10-year period then, Senator, it was $5.6 trillion.

Senator SARBANES. A surplus of $5.6 trillion?

Mr. CRIPPEN. Over the 10 years, yes.

Senator SARBANES. That was before the tax cut was passed; correct?

Mr. CRIPPEN. Yes, that is correct.

Senator SARBANES. What are you projecting now for that period?

Mr. CRIPPEN. For the same period, $1.6 trillion, so $4 trillion less.

Senator SARBANES. Your projections have dropped from $5.6 trillion surplus to $1.6 trillion surplus?

Mr. CRIPPEN. Unfortunately, that is correct.

Senator SARBANES. Four trillion gone.

Do you take issue with this chart that the Chairman prepared— this is for the 10-year period-that projects that the loss of surplus, the $4 trillion that has been lost-about 70 percent of it, I guess, has been lost-that 42 percent of that, not quite half, but getting there, is as a consequence of the tax cuts; is that correct?

Mr. CRIPPEN. Yes.

Senator SARBANES. So the tax cuts-the economic changes are 23-the tax cuts are about twice as significant as any other item in terms of explaining that drop; is that correct?

Mr. CRIPPEN. Yes.

Senator SARBANES. OK. Now let me ask you this question. What are you now projecting for the 10-year period in terms of the surplus?

Mr. CRIPPEN. $1.6 trillion over the same 10 years as comparable there.

Senator SARBANES. No-you now update it a year

Mr. CRIPPEN. $2.6 trillion; right.

Senator SARBANES [continuing]. You come in a year later, and now you extend it out, so you do it from 2002 to 2012, I think. Mr. CRIPPEN. That is correct.

Senator SARBANES. What do you project as the surplus over that period of time?

Mr. CRIPPEN. It is $2.3 trillion.

Senator SARBANES. $2.3 trillion?
Mr. CRIPPEN. Yes.

Senator SARBANES. How much of that is in the last 2 years of the 10-year period?

Mr. CRIPPEN. $1.1 trillion.

Senator SARBANES. $1.1 trillion of the $2.3 trillion is in the last 2 years?

Mr. CRIPPEN. Right.

Senator SARBANES. So roughly half of it is in the last 2 years of the 10-year period; is that correct?

Mr. CRIPPEN. That is right.

Senator SARBANES. Of course, this tax cut that we have been discussing which has had such a profound effect is going to sunset in 2010; is that correct?

Mr. CRIPPEN. Yes.

Senator SARBANES. Supposedly.

Mr. CRIPPEN. Right.

Senator SARBANES. And I do not know of anyone who really-in fact, I think there is an effort now on the part of some of my Republican colleagues to make it permanent right now, if I am not mistaken. But in any event, so when you project the surpluses in 2011 and 2012, the $1.1 trillion that is half of the surplus that you are projecting, that is assuming that the tax cut will in fact sunset because that is what the current law provides; is that correct? Mr. CRIPPEN. Right.

Senator SARBANES. How much of this surplus that you are projecting will come from the Social Security Trust Fund of the $2.3 trillion surplus?

Mr. CRIPPEN. More than the total-2.5 trillion over the 10 years comes from Social Security.

Senator SARBANES. So you are projecting a $2.3 trillion surplus— that is unified surplus

Mr. CRIPPEN. Right.

Senator SARBANES [continuing]. And you are projecting a $2.5 trillion surplus in the Social Security Trust Fund?

Mr. CRIPPEN. Yes, total off-budget, right.

Senator SARBANES. So you are projecting a deficit in the budget other than the Social Security Trust Fund; is that right?

Mr. CRIPPEN. That is right.

Senator SARBANES. So in order to avoid saying that we have a deficit, we in effect have to utilize the surplus of the Social Security Trust Fund; is that correct?

Mr. CRIPPEN. Correct.

Senator SARBANES. Mr. Chairman, I thought that everyone was making all kinds of undertakings and assurances that we would not be going into the Social Security Trust Fund surplus in order to achieve a budget surplus; is my recollection mistaken in that regard?

Chairman CONRAD. No. The Senator is exactly right. I think virtually everyone who is in public office promised not to use Social Security Trust Fund money for other purposes.

Senator SARBANES. So in effect, to avoid reflecting a deficit, which results 42 percent from these tax cuts, we are having to offset it with the Social Security Trust Fund surplus; correct?

Mr. CRIPPEN. That is correct.

Senator SARBANES. Intake into Social Security is from the payroll tax; is that correct?

Mr. CRIPPEN. Correct.

Senator SARBANES. And I think the payroll tax is generally recognized as falling most heavily on working people. It is not a progressive tax. It is seen as

Mr. CRIPPEN. It is only a tax on labor, so it is not a tax on capital at all.

Senator SARBANES. No; it does not tax capital at all, and to the extent it taxes labor, it is a flat tax, which disproportionately affects lower-income people; isn't that correct?

Mr. CRIPPEN. It is capped somewhere in the neighborhood of $85,000.

Senator SARBANES. That is right. So above $85,000, you stop paying it; right?

Mr. CRIPPEN. Correct.

Senator SARBANES. So those taxes coming into the Social Security Trust Fund that create that surplus are being used to offset the deficit that is being run in order to give these tax cuts.

Now, I ask the Chairman if my recollection is mistaken. I understood that well over 50 percent of the benefit of the tax cuts went to the very top 1 percent, I think, of the income scale; is that correct?

Chairman CONRAD. I do not recall the exact percentage, but a disproportionate amount of the tax reduction went to the wealthiest 1 percent, even disproportionate to the amount of taxes that they pay.

Senator SARBANES. And in order to in effect assert that we do not have the budget in deficit, and if we are using the Social Security Trust Fund surplus in order to do that, we in effect are using the revenues that are gained through the payroll tax, which disproportionately hits working people. So you have a double blow here. You have the revenue inflow used to try to create a surplus situation coming disproportionately from working people, and you have the tax cuts going disproportionately to people at the upper end of the income scale. So the working people get hit twice under this arrangement as I perceive it.

Chairman CONRAD. It is a perverse result of what has occurred, and in effect you are taking payroll tax dollars to fund in part an income tax cut that disproportionately goes to the wealthiest earners in the country.

Senator SARBANES. I am sure that we will explore that point further as we go through these hearings.

Mr. Chairman, I see there is a vote on, and I know we have to draw this to a close, but I very much appreciate your yielding. And Director Crippen, we are pleased to have you back before the committee.

Chairman CONRAD. I want to thank all of my colleagues on the committee. We do have just a few minutes remaining in the vote, so we will have to leave. I want to again thank you, Director Crippen, for being here and for your answers to these questions. Obviously, we have differences of opinion on the issues, those of us who are seated here, but we very much appreciate your sharing your projections with us and the very hard work done by you and your committee staff to prepare this work on a timely basis for the consideration of the Congress.

Mr. CRIPPEN. Thank you, Mr. Chairman.

Chairman CONRAD. The committee is adjourned.

[Whereupon, at 12:25 p.m., the committee was adjourned.]

OPENING STATEMENT OF SENATOR GORDON SMITH

Good morning and I'd like to thank you the Chairman and ranking member for the hearing and say that I'm looking forward to working with both sides of the aisle to produce a real bipartisan budget this year.

Like many on this committee I want to produce a budget that will do much to protect our Nation, bolster our troops in the fight against terrorism and address a host of domestic issues at home in my State of Oregon.

I would also like to say at the outset that I'm against any increases in taxesI strongly believe that the current tax cuts must stay intact and their effect will do much to bloster the pocketbooks of Oregonians who paid-sent their money, in good faith, to Washington, DC.

One of my top priorites this year will be to direct funding toward the uninsured. It is nothing short of a moral outrage that so many Americans lack health insurance coverage even as they live and work in the wealthiest Nation on earth. I have worked in the past with my colleague and friend, Senator Wyden who also sits on this committee. And I can promise you that this year we will again join forces in the effort to bring health insurance to those in Oregon and across the Country who lack coverage.

Mr. Crippen, I welcome you back before the Senate Budget Committee and I look forward to your testimony

PREPARED STATEMENT OF SENATOR CHUCK GRASSLEY

With today's announcement that the Federal Government is once again facing near-term budget deficits, we're going to hear a lot of talk from the critics about the need to postpone or even repeal last year's bipartisan tax cut.

The critics say we should revisit the tax cut for two reasons. First, they claim the tax cut is responsible for our return to budget deficits. Second, the critics claim the tax cut will jeopardize our long-term economic growth. Let's consider each of these claims in turn.

According to the Congressional Budget Office's projections, the tax cut is responsible for less than 15 percent of the reduction in this year's surplus and less than 40 percent of the reduction in surpluses over the next 10 years. The slowdown in our economy and the additional spending enacted last year are responsible for most of the deterioration in our budget outlook.

The second criticism is that the tax cut will reduce the surplus, thereby exerting upward pressure on interest rates, and thus reduce future economic growth. A recent report by the Joint Economic Committee, however, concludes there is no evidence to support this criticism. According to the JEC, “empirical studies on interest rates have uniformly failed to find any statistically significant relationship between interest rates and the budget balance of the U.S. Government." This result is likely due to the fact that the deficits we have seen in the past were not large enough to affect interest rates given the overall size of our financial markets.

If the tax cut is not responsible for rising deficits and higher interest rates, why do the critics still complain? One reason they want to delay or repeal the tax cut is because they want to spend the money. Some critics have already announced their plans to spend the tax cuts. As more of their spending plans become public, it will become obvious their cries for "fiscal discipline" are nothing more than crocodile tears.

In addition to the critics who want to spend the tax cut, there are also critics who insist we cannot afford the tax cut because our long-term budget projections show Federal spending will exceed revenue by 25 percent within 50 years.

To argue we cannot afford a modest tax cut today because we will need a huge tax increase in the future is to ignore the obvious. Congress cannot provide more government than taxpayers are willing to pay for. Throughout our country's history the Federal Government has never taken more than one-fifth of our Nation's income in taxes. If we are not willing to pay 25 percent more for government, why should we expect our children and grandchildren to do so? Our challenge today is to get beyond the rhetoric and begin to make government affordable once again.

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