Senator Crapo Discusses the Economy

Mr. CRAPO. Mr. President, I appreciate the opportunity to discuss this important issue. This week we are going to be discussing a number of critical issues, as has already been mentioned by a number of those who have spoken. It is expected that the possibility of war with Iraq will come closer, if not become a reality, sometime in the near future. At the same time, we are debating probably the biggest economic issue, and the biggest issue for the management of this country, that the Senate will deal with this year, as we put together the budget resolution. In that context, I will basically give a brief overview of how we got to where we are, where it is that we are, and the decisions we will be making.

Many people will remember that a few short years ago we were talking about major surpluses across the board and for as far as we could see into the future. In fact, I have in front of me a projection that was based back in January of 2001, which estimated that in this budget year that we are working on right now, the 2004 budget year, the surplus was projected to be around $396 billion. This same sheet shows what the projection today is as opposed to what was projected in the year 2001, and the projection is around a $199 billion deficit. In other words, just for the budget year in which we are working, the projections over the last essentially 2-plus years have gone from a projection of a $396 billion surplus to a $199 billion deficit.

Now, what caused that? We will hear a lot of debate about what caused it. In fact, it has already been said today that President Bush's tax cut from a few years ago caused it, that President Bush's economic policies have caused it. In reality, we are going to see some of the numbers that have been put together.

What happened is that on 9/11 the United States was attacked by terrorists and people saw the World Trade Center collapse. People saw what happened very vividly as the United States responded to the fact that we were at war with terrorists. Following that, there were massive increases of spending at the Federal level; spending required to respond to the 9/11 attacks; spending required to address the war against terrorism, for example, the war which we have fought already in Afghanistan; spending to deal with our homeland security; spending to deal with strengthening our national security and preparing ourselves to be sure that America and Americans are safe throughout the world as we deal with an increasingly dangerous world.

In addition to that, spending has gone up on health care. Spending has been driven up in a number of the other social areas of our budget. We saw very little relief, if not in fact dramatic increasing pressures, for spending in the last 2 years. At the same time, the economy collapsed.

I will put up our first chart. We have seen this chart already today, but this chart shows that at the same time our spending started to go through the roof, as spending started to go up dramatically, revenue, which is the blue line, dropped off dramatically. The revenue dropped off dramatically for a number of reasons. It has been said that the revenue dropped off because of President Bush's tax cut. In part, that is true, because although that tax cut was phased in over 10 years and although most of that tax cut has not even occurred yet and cannot be the responsibility of these declines in revenue, a part of it was. There was tax relief, and as a result of that tax relief there was some decline in revenue. However, let's go to the next chart.

This next chart is another way of looking at the same thing. Again, the blue is revenue and the red is spending. The revenue since 2000 has gone down precipitously. The spending in Washington has not. This is another way of showing we are facing the dual problem of increasing pressures on spending and reducing our falling revenue to support the Federal budget.

Why did the fall-off on revenue happen? This chart shows what happened in our economy. This is the Nasdaq. Starting in 2001, it hit about 5,000. It is now down to—when the chart was made—around 1,200 and is hovering in that neighborhood today, about a 75-percent reduction in the values just on this market. The same type of charts could be put here for the New York Stock Exchange or for other exchanges across the world which have seen worldwide dramatic reductions in economic activities.

Virtually everyone who pays any attention to the economy these days knows the bubble popped and the economy went into a serious collapse. Many have called it recession. We have held dozens of hearings in Washington to understand what happened, why it happened, and how soon we will be able to climb out. People know about the Enron debacle, the WorldCom debacle, and the loss of confidence the American people have in our markets today, which loss of consumer confidence has generated further difficulty in the economy. People are also aware we are potentially going to have to go to war in Iraq. That cloud over the economy itself is generating the kind of lack of confidence in economic activity that causes us to have difficulty in seeing a rebound in the markets.

The next chart shows what it was that caused us to see the dramatic change in our deficit. This chart shows the year 2004. There are charts that can predict it out for 10 years and add in some of the proposed stimulus package. But this chart shows what caused us to end up where we are today in the budget.

Over half of the problem we are facing is what I have been discussing, the weak economy and changes in the estimates of what revenue will be coming into the Federal Government through our current tax and revenue structure. As I indicated, a portion is attributable to tax relief, although this is static scoring, and if one looks at what tax relief does to the economy, I suspect that number will go down dramatically. Static scoring shows nothing but 100 percent loss of revenue for any tax dollar relief.

But we know when there is tax relief, that causes an impact in the economy. That dollar is not spent by the Federal Government but spent somewhere else, and if the relief is effectively projected, it could be significant. So this number could be reduced significantly. But even if we use static scoring and say a tax cut reduces revenue, dollar for dollar for the Federal Government, only 19 percent of what we look at now is attributable to the tax relief we passed a few years ago in the Senate and the House. That is another 6 percent for tax relief not attributable to the vote a few years ago and the increased spending.

Take just the increased spending that has been caused in Congress by September 11, the war on terrorism, the need to beef up our national security, the increases in health care costs, and a number of other cost drivers we have in our budget. Take the increased spending and the collapse of the economy. It represents 75 percent of why we are where we are.

I suspect during the week we will hear how President Bush's economic plan caused us to be where we are. Here are the facts. There will be a lot of projections and a lot of charts, but nothing can change the reality of what happened on September 11, what our response to it has been, and what happened in the economy following that. That, in a nutshell, is what caused us to end up where we are.

With that explanation of what happened, we get to a situation where this economy has put forward a budget. I will be rough in my numbers because I don't have the charts in front of me. If we do nothing, if this committee simply says we will keep Federal spending at its current levels—we will not drive it up or down, we will not reduce taxes or increase taxes, we will take current law as it now sits—someone could give me a more accurate number, but it is in the neighborhood of $150 to $200 billion of deficit, if we do nothing.

The question is, Should we do something? Should we cut spending in an effort to keep the difference down? Should we raise taxes? I don't believe there is anyone who is suggesting raising taxes right now is a good idea. But there are those who are suggesting because of this, because the economy is no longer contributing what it was contributing before, and because if we learned any lesson in the last few years, it is that the way to get out of these economic difficulties in the Federal budget is to have a strong, flexible, dynamic, vibrant, resilient economy—if we want to do something to make this gray part of the chart get stronger and become better in terms of generating revenue for the Federal Government, then we should have some kind of a stimulus package.

So the debate comes around: Should we cut spending? Should we freeze spending? Should we keep spending controlled? Should we reduce taxes? Should we have a stimulus package? And if so, what, and how?

Looking at the spending side of this equation, the spending drivers in this budget are the beef-up in our national security. In fact, these numbers do not even include the possibility of a war with Iraq. I will talk about that in a moment. The increase in our national security spending, the increase in the costs of fighting the war on terrorism, the increases in homeland security, and the increases in health care—and there are a few others—are the main drivers of the increases in costs in this budget. I don't believe there are very many in the Senate, or in America, who would say right now is the time to cut defense spending or right now is the time to cut homeland security spending. We can hold the line, and we are going to do that, and this budget does put significant pressure on holding those lines, but there is not a lot of room in the circumstances we see right now to reduce those spending areas, although we will work our hardest to do so. I believe we will do so in a bipartisan fashion to get to the right numbers on the budget.

To make a quick aside, I have fought for a balanced budget amendment for years. I still believe we should have one. As I and others have fought for a balanced budget amendment, one of the examples for exceptions we have always acknowledged is we could see a situation where we would need to tolerate deficits for a period of time if we were facing war or a national emergency declared by the President. Today I believe those circumstances face us. I believe we are at war today with terrorists. I believe it is very possible we will be at war with Iraq soon. And I believe we face a national emergency in terms of our homeland security needs. Those are the unfortunate realities that cause us to have very little flexibility on the spending side of this budget, although again I say we are going to do everything we can to bring it under control on the spending side.

The question is, What do we do then, after we have done everything we can on the spending side? By the way, contrary to some of the arguments heard today, the budget proposed works its way back to a balance. It takes 10 years to do so. I am very disheartened by the fact, with the spending pressures we see and with the revenue drop-off we have seen, that our projections are going to take us 10 years to get back into balance. The fact is, this budget balances over the 10-year period.

What do we do when we look at this revenue side? The question is, Do we do nothing? There are those who have advocated today that we should not have any tax relief. One argument is, have no tax relief until we know what the cost of the war is. Another argument is, have no tax relief because we should not have tax relief when we face this kind of spending pressure in the budget. And when we face these kinds of problems we have talked about that legitimately cause us to have to increase expenditures in major categories, we should not be looking at tax relief.

There is another side of the argument, and that side of the argument is, unless we do something to give a basic boost, a shot in the arm, a revitalization to our economy, we will see the grow-back of this weakened economy be much slower. It gets back to that argument about dynamic scoring, of what a tax cut really will do. That is one of the reasons President Bush has proposed—and this Budget Committee has proposed to the Congress—that we have tax relief.

As our chairman of the Budget Committee has indicated, this Budget Committee does not write the tax bill. We simply tell the rest of the Congress, and in this case the Finance Committee, how much money we are willing to budget for them to utilize in establishing a tax cut. Then the Finance Committee can come together and, in its best wisdom, craft the most effective tax cut designed, in their opinion, to do the best for our economy.

That having been said, there are proposals out there. The President made his proposal. This budget accommodates the President's proposal. The President's proposal is to do basically three things.

It is to take the tax cut that we passed in the year 2000 and make it permanent. Most people in the country never quite understood why it was that Congress would pass a tax cut and make it only last for 10 years, phase it in over 10 years, and then have it expire basically as soon as it is phased in. It has to do with some interesting procedural requirements on the floor of the Senate which I will not get into now, but the fact is the tax cut which was implemented a few years ago will expire in 10 years, and the first part of the President's plan is to make it permanent.

The second part is to say we should not phase it in over 10 years. We should accelerate it and implement it all now.
The third part has a number of pieces, but the core of it is elimination of double taxation on dividends.

Let's put up the next chart.

There is a big attack on this. Frankly, in all these areas the attack starts out—you will hear this said dozens of times in the next few days—it is a tax cut for the wealthiest of Americans.

I have been in Congress now 10 years. I served 6 years in the House, 4 years in the Senate. I am in my fifth year in the Senate. Over that 10 years, in virtually every year I and others like me who want to see taxes cut and reduced, when we have fought for tax relief, every single solitary time that we proposed a tax cut of any kind or nature, it has been attacked as a tax cut for the wealthy. Every time. Even when all we did was propose the marriage tax penalty elimination, it was attacked as a tax cut for the wealthy.

The common rhetoric of those who do not support reducing the Federal tax burden begins with "a tax cut for wealthy Americans," because the attack is that any tax cut is going to benefit the wealthy. If you look at the numbers, as to who pays taxes in America, it is primarily those in the upper income brackets who pay by far the largest percentages of the taxes. So if you look at actual dollars, you can make that argument.

But if you look at what is being done in the tax relief proposed by the President on a proportional basis, on a percentage basis, the biggest amount of tax relief is going to those in the lower income brackets.

As this chart shows, those earning from zero to $30,000 will have their taxes reduced by 17 percent. Those earning from $30,000 to $40,000 will have their taxes reduced by 20 percent. In the $40,000 to $50,000 category, the reduction is 14.5 percent.

You can see as you go up in income categories, until you get past the $75,000 to $100,000 figure, the higher percentage reductions are all occurring in the lower brackets. The higher income brackets have the lowest percentage of income reduction.

Again, one could take the actual dollars, but because very few numbers of Americans fit in these categories proportionately, but they make the higher levels of income, a smaller reduction in their taxes is going to give them a higher dollar benefit and people can use dollar numbers to show that. But the reality is that the higher percentage of relief is going to those in the lower income categories. It is pretty much impossible to have a tax cut, unless it is just a tax cut for the lower brackets, that doesn't have some relief across the board, and then allow those to make that argument about the tax cut for the wealthy.

In my opinion, it is class warfare. It is attempting to say those at the upper ends of the income brackets in America should have no tax relief and all tax relief should be favored toward this end, toward the lower income brackets. What happens if you follow that logic is that eventually no tax cut is ever acceptable because the tax down in these categories gets to the point where, no matter what you do with it, unless you eliminate it, it doesn't generate the revenue reductions or doesn't generate the stimulus to the economy that is necessary to get the impact that is desired. That is where we are today. That is why we are seeing these arguments.

I think it is very unfortunate that every time we try to cut taxes in this Congress the first response is that whatever the tax is that is proposed to be reduced, it is a tax cut for the most wealthy Americans.

Let's go back to the chart I just took down. With regard to the proposal that we eliminate double taxation of dividends, Charles Schwab, the founder and chairman of Charles Schwab Company, indicated in a Washington Post commentary on March 11 of this year:

I can't think of any other tax policy that would, at one stroke, be more beneficial to ordinary investors.

I suspect somebody could say only rich people invest, and therefore this is a tax cut for the wealthy. But I do not think that argument is going to be made too strongly on the floor this week because most Americans are now involved in the markets in one way or another, even if it is only through their retirement plans. But most Americans know it is critical to see things like the New York Stock Exchange and the NASDAQ and others get a boost.

Charles Schwab goes on to say:

The impact [of dividend relief] would be enormous.

I believe in that same commentary he indicated his personal belief to be he would expect to see the stock market rise 10 or 15 percent with a renewed bolt of confidence throughout the entire economy just by doing what the President has proposed with regard to the double taxation of dividends.

We have another financial expert in the country who has weighed in on this issue, Alan Greenspan, on February 12, before the House Financial Services Committee:

In my judgment, the elimination of the double taxation of dividends will be helpful to everybody.

I think he was responding directly to this notion that it only helps a certain class in society. He was responding to this class warfare argument that continues to be brought up as we try to address tax policy. He said:

There is no question that this particular program will be, net, a benefit to virtually everyone over the long run, and that's one of the reasons I strongly support it.

The reason it is strongly supported by these experts is because today, as has been indicated by others who have spoken on the floor, there is very little incentive in a corporation to generate dividends. That is because, if those dividends are paid out, they are taxed twice. As the chairman of the committee indicated, the net tax burden is about 70 percent. Whereas, if the corporation instead incurs debt, and further leverages itself, then it gets a deduction for that debt or it gets a deduction for a portion of the debt costs. So it can actually get a tax benefit for going further into debt, and it pays a tax penalty if it sends out dividends to its shareholders.

What we have seen is corporations increasingly following this path because of the pressure that is put on them by our Tax Code, putting themselves further and further into leveraged positions which I believe is one of the reasons we saw what happened to Enron. That is why Enron had to go through these incredibly complicated sets of transactions to try to mask the amount of debt it was really carrying. It is the same with many other corporations.

If we want to encourage corporate America, which generates strength and jobs for this country and the families which depend on those jobs, if we want to generate pressure in the business community for the kinds of proper decisionmaking that will give us stable, strong businesses that will generate strong and lasting jobs, then we need to address the policies by which we tax them. We need to encourage policies that will support dividend payment rather than debt. That is one of the reasons why you see so many experts saying it is critical for us to move into this new kind of tax policy.

The question is—given it is good policy—can we do it now with this very dire budget situation we face? That is a tough question. It is a tough question for me to answer because in the short term it will cause our deficits to go up, although the amount of that is in discussion and in dispute because some will use static scoring, and some will use dynamic scoring, and we really don't know the dynamics of it.

There will probably be charts here today that show all these projections have the potential to be widely inaccurate; and we all agree with that. But the fact is, we do know there is a dynamic that occurs when we change our tax policy, and the experts are telling us that dynamic will be beneficial to making our economy more flexible and more resilient.

So the question is, Do we take this stand now? Do we do what is necessary to give a boost to the economy, realizing it may take a period of years for the real strength of it to build us back to where we have made our posture stronger, do we sit tight and do nothing now and hope the economy grows out of it on its own or, as some will probably suggest, do we spend ourselves into prosperity? Does the Federal Government take the position that we need to have a lot of spending, a lot of stimulus in the economy, and we should just not concern ourselves with the deficit but spend ourselves back into a strong position economically?

As you might guess, I strongly reject that "spend ourselves back into prosperity" argument. It will probably never be said that way today or throughout this week. But I encourage people who follow this debate to note, when amendments are proposed, do those amendments drive up the deficit or do they not? Do those amendments drive up Federal spending or do they not?

Let's go back to that first chart with the lines, because as we debate amendments on this budget, the amendments will generally have one of two or three impacts. They will either be deficit-neutral, which means they could increase spending by increasing taxes or they could reduce taxes, which is reduce this line, or they could increase spending, which is this line.

I think it is very important for people to pay attention to the amendments that are offered because this whole week I hope we do not get any amendments on the floor that would drive the deficit up with more spending. I would hope we would recognize the deficit increases that are caused by the tax reductions can be addressed with an understanding of the dynamic impact they will have over time.

Just a couple of other arguments I want to address.

It has been said the proposals of this budget spend the Social Security trust fund. I understand what is being said there. Let me clarify what the situation is because I do not believe Americans should go away from this debate believing that somehow the Social Security trust fund is being robbed. The fact is, regardless of whether the tax cut is eliminated from this budget or whether it is put into this budget, the Social Security trust fund, at the end of the 10-year cycle, will be about $4.1 trillion. It will be the same trust fund no matter what happens. Because what occurs is that, in the Social Security trust fund, the excess that comes in from payroll taxes that is not spent out into the Social Security system is a part of that surplus. That surplus is turned into Federal debt instruments.

Then, what are those Federal debt instruments used for? Spending, or for tax relief, or for whatever is a matter for Congress to address. But the fact is, those Federal debt instruments are there, and they are still there to protect Social Security.

My last point. Some have said we should not do anything because we are possibly going to be going to war. Again, the argument there seems to be that tax relief is not wholesome for the economy; therefore, we should not be doing anything to destabilize the economy.

I believe what I have said indicates where I come down on that point, that the fact is we must do something to stimulate and strengthen this economy. The medicine we need is in the President's proposal and is made possible by the projections of this budget.

Although we will face some very expensive and very difficult budget decisions, if the United States goes to war in Iraq, that simply increases the need for us to do our best to make this economy strong and to do what we can, through our tax policy decisions, to put us in the best posture to have a flexible, resilient economy in these difficult world circumstances. So for all these reasons, I encourage this Senate to support this budget.

I yield the floor.