Hearing of the House Budget Committee on the President's Budget Proposal for Fiscal Year 2005

HEADLINE: HEARING OF THE HOUSE BUDGET COMMITTEE

SUBJECT: THE PRESIDENT'S BUDGET FOR FISCAL YEAR 2005

CHAIRED BY: REPRESENTATIVE JIM NUSSLE (R-IA)

LOCATION: 210 CANNON HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: PANEL I:

JOSHUA B. BOLTEN, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET;

N. GREGORY MANKIW, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS;

PANEL II:

PETER R. ORSZAG, PH.D., SENIOR FELLOW, THE BROOKINGS INSTITUTION

BODY:

REP. JIM NUSSLE (R-IA): The budget meeting will come to order. This is a hearing on the president's budget for Fiscal Year 2005. We are very pleased again today to have before us the director of the Office of Management and Budget, Mr. Josh Bolten, and the honorary-or the Honorable Gregory Mankiw, who's the chairman of the Council of Economic Advisors.

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REP. TAMMY BALDWIN (D-WI): Thank you, Mr. Chairman, Ranking Member Spratt. One of the best ways to appraise this budget is whether it conveys to the American people that this president understands the problems they are facing and attempts to confront those problems head on.

Mr. Bolten, today I would like to take a little opportunity to look at how this budget will affect my constituents and it seems to me that the president's priorities are more tax cuts and that those tax cuts continue to benefit the most affluent Americans over lower and middle income Americans and over immediate issues of jobs, healthcare and education and, parenthetically, these are the chief three issues that my constituents raise to me when we get a chance to meet and share. This budget makes most of the provisions of Bush's 2001 and 2002 and 2003 tax cuts permanent and at a projected cost of $1.31 -- sorry, $131.6 billion over five years but at a cost of $936.3 billion over 10 years or at $2.2 trillion when one includes interest on the debt.

The budget also proposes a series of new tax favored savings accounts, the Lifetime Savings Account and a new tax favored Retirement Savings Account. And in both of these cases, programs appear affordable in the short term five-year picture but when fully mature, these are projected to cost up to $50 billion per year. These tax initiatives, all of them combined, will certainly drive us deeper and deeper into debt and disproportionately, as I mentioned earlier, enrich the very most affluent in our country.

In so doing, this will also squeeze out immediate hope of doing some meaningful things to address our constituents' top challenges: jobs and healthcare and education, as I mentioned before.

The effect of extending tax cuts that have previously been passed and are due to expire remains similar to the original packages before us, the top 1 percent of households will receive on average a $58,000 tax break yet the average middle income family will receive a tax break of just around $635. So of this commitment of just under $1 trillion over 10 years, over 47 percent, or $440 billion, will go to the top 5 percent of households and that's a larger share than the entire share the bottom 90 percent get when combined.

I think the new savings plan would similarly benefit the very wealthy. The Lifetime Savings Account, when fully up and running, according to some estimates, will provide the top 5 percent of the population with 50 percent of the tax benefit. The to 10 percent would secure two-thirds of the tax benefits and, believe or not, the Retirement Savings Account is supposed to be even more skewed in terms of who receives the tax benefits.

And I don't have time right now to go into some of the reasons for why these appear so skewed in the out years. If you look at even current law, the Treasury Department says that only 4 percent of those currently eligible to contribute to IRAs are able to actually max out and 5 percent of those participating in 401(k)s are able to actually contribute to the minimum. These are the people who are going to receive the real benefit of these new proposals.

But bringing it back home, the average family of four in my district will not get a lot of these benefits from these trillion dollar commitments that we're making over the next 10 years, aside from additional interest payments on rapidly expanding debt. And yet, families in my district are still struggling with recent job losses and significant increase in health insurance costs. And it appears from this budget, reacting to these is simply not a priority.

Well, do you dispute the out year, the 10-year estimate from 2009 to 2014 on the tax cuts expansion that I just mentioned and also the fully implemented savings programs?

MR. BOLTEN: Ms. Baldwin, I don't actually have the numbers at hand on the LSAs and the RSAs. I'm going to ask Mr. Mankiw to say something about that in a second. With respect to the extension of the tax programs, I think your numbers sound about in the range that we have estimated. I think those were roughly the numbers that we were carrying in the budget tables at the back of our proposal.

Mr. Chairman, if I may go over Ms. Baldwin's time for a couple of minutes because she raised several very important issues. Can I ask for one chart to be put up on the screen about the tax cuts because you expressed some concern about the tax cuts being skewed to the rich. One of the things that happen with our Tax Code and has happened increasingly over time is that wealthy people have paid a larger and larger percentage of the total income tax. So therefore if you cut taxes, wealthy people tend to get more of the tax cuts but the net effect of the tax cuts that this Congress passed and the previous tax cuts that the previous Congress passed in '01, '02 and '03 has been to make the Tax Code more progressive. And that is demonstrated on this chart.

Let me take one example, which is the top 5 percent. Those are the top 5 percent of income earners in this country. Those are people making more $135,000 a year and I think most of us would accept that that's somebody in a pretty high income range. In that group, the top 5 percent, before the tax cuts, if you took out all of the tax cuts, the income tax cuts that you all adopted, those people were paying 50 percent of the total tax revenue in this country. The top 5 percent would have been paying 50 percent of the total tax revenue.

After the tax cuts, that same group is paying 53 percent of the total tax revenue in this country. The result of the tax cuts that you all enacted has been to make the Tax Code more progressive rather than less. And I think that's the kind of relief that the tax cuts have made. More importantly than arguing sort in the rearview mirror about whose benefiting more than who, because there's a lot of benefit to go around in these tax cuts, the important part about the tax cuts is that they benefit the economy.

Jobs is number one, I imagine, in your district. People care most about jobs. And where the jobs are coming from is especially in the small businesses of America. Those small businesses, typically through the sub-chapter S corporations pay the top income tax rate. They flow through their income. They pay the top income tax rate. So when you talk about the tax cut benefiting the rich, a lot of the people getting that tax cut are the businesses. They're getting it through their business to create jobs which the small businesses in districts all over America that are really creating jobs. When they get that tax money, they are able to plan. They are able to invest and they are able to use that money to create jobs.

Now if you care about jobs going forward, the worst things we can do for those folks is threaten them with a tax increase. That will choke off the economic recovery that we are now seeing and all those people to draw in on their investment and fail to create the jobs that I think are the most important things on your mind and on the president's mind as well.

Let me ask Dr. Mankiw to say a word about the LSAs and RSAs.

MR. MANKIW: Let me say a word about the broader economic impact of tax provisions aimed at increasing private savings. Private saving is now low by historical standards and that is the concern of many economists and it's a concern both at the micro level that people may not be saving enough for their own needs but it's also a concern at the macro level because one of the things we learn in basic macroeconomics courses is that savings provide the funds available for an investment in the economy: new factories, new equipment, new housing. Investment in turn leads to capital accumulation. Capital accumulation in turn leads to productivity growth, and it is growth in productivity that allows rising incomes, rising real wages and rising living standards for American families.

So in thinking about the LSA/RSA proposal, it's important to think about this not only in terms of its immediate effect but the fact that this is going to provide incentives to save, which in turn is going to provide the foundation for longer term economic growth.

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