budget. there's no certainty on the tax reform side, that's for sure, or on the tax code, on regulatory reform. no sustainable credible debt reduction plan, because debt also affects the confidence of the private sector. 84% of small businesses have indicated the size of the national debt affects their feelings and their confidence about the future of their own business. we know what, you know, this current tax code is doing to affect the ability to create jobs. so where is it in this budget that you would suggest that it creates certainty for the future so that the private sector be willing to take the risk and get the kind of robust recovery that the american people deserve? in fact, i just read a study that was issued by three academics last fall and they talked precisely about this point. and i quote, they said a major factor behind the weak recovery and gloomy outlook is a climate

of policy induced economic uncertainty. and that u.s. policy uncertainty is at historically high levels. if we had the 2006 levels of policy uncertainty, it would have yielded 2.5 million jobs over 18 months. i think the point is there aren't any policy prescriptions here as i see it in this budget. uncertainty continues to reign. if anything is certain about the budget it's that there will be more uncertainty, in my view. >> thank you, senator snowe. you won't be surprised i disagree with your diagnosis of the problems facing the american economy. i think we disagree fundamentally on how best to solve them. let me cite a few things in evidence in support of the contrary argument. i know people say, lot of people say on your side of the aisle that what's hurting the american economy now is a set of policies from washington, from congress and the administration, that is hurting business and hurting business confidence. that's a centerpiece of concerns

we hear about the challenges facing the american economy. and yet profits as a share of gdp are above the levels they were before the crisis. the profitability of industries that are in the public eye in terms of reform and regulation like energy and health care are very high. levels of productivity growths have been improving through the recovery. investment, private investment in equipment and software is up 30%. if you look at any measure of basic health of the business sector outside of construction, which is still way down by the crisis, the basic balance of american business levels or profitability, expected profitability, is very, very strong. the economy, though, is still suffering badly from all the aftereffects of the crisis. you can see it in high unemployment rates and you can see it in high levels of poverty

in the weakness in construction. now, we have laid out -- i know they're tough and they are going to be controversial and i know you guys don't like the tax stuff in there but we have laid out a responsible, tough set of fiscal reform plans. if those were embraced by the congress tomorrow, there would be substantially more confidence around the world in the capacity of this political system in washington, in our ability to go back to live within our means. it would be embraced and welcomed and you would leave people much more confident about the future of this country in terms of growth and opportunity. you're also right to emphasize and i think senator hatch did this very well, if we sit here and do nothing about these long term fiscal problems, even though interest rates are 2% today, over time, over the long run, that will hurt us. it will starve key things we have to do. it will hurt confidence in the country. that is a problem we'll have to deal with. we can't ignore that.

it's why we probably want to start the debate now by how we lay the consensus on broader reforms but i do not believe there is a credible argument to make that uncertainty about our fiscal deficits or uncertainty about the design of regulation in washington today is having a material adverse effect on the american -- it's suffering from many things, it's not suffering from that. again, if it were the case, you would see very, very different numbers in profitability, things we can measure, in what's happening by businesses in terms of how much they're investing. you see it in interest rates, in equity prices. you would see all sorts of things we can measure today. having said that, i agree with you that it would be better for the country, for congress to provide some certainty about how we're going to address these long term fiscal problems and we should begin that sooner, not later. >> senator menendez? >> thank you, mr. chairman. mr. secretary, thank you, and thank you for your service to our country. i just want to ask, i heard some

of my colleagues ask questions about the long range. does anyone believe that or would you say that the budget that's presented would be different if we weren't facing a decade of tax cuts largely unpaid for, two wars raging abroad that have been raging abroad in iraq and afghanistan totally unpaid for, and a new entitlement program under medicare part d unpaid for, and the reality of instead of a free market which i'm a huge supporter of a free for all market, in which the excesses of some entities became the collective risk of all of us as americans. would the budget be different if that hadn't been the preface by which this administration was working? >> of course. when president clinton left office, in 2001, cbo projected ten years of trillions of dollars of surpluses.

when president bush left office, cbo projected trillions and trillions of dollars of deficits. those deficits were the result of two factors. the first factor are the ones you referred to. a decision by the president and the congress not to pay for two wars, very expensive tax cuts and a very substantial expansion of medicare. the deficits are also the product, though, of two recessions. a milder recession in the early part of president bush's first term, and a terribly severe recession that began in 2007. now, a modest portion of our future deficit are the result of the policies we proposed. somewhere between 10% and 15% of the projected deficit are the result of the factors that the budget proposal we made. now, you're right that we would be in a much stronger position today, we would not face anything like the changes we face today on the tax side or the spending side if we had not made those choices as a country

under the previous administration on fiscal policy. we took a remarkably strong fiscal position and we jeopardized future generations of americans by eroding that -- those huge gains on fiscal discipline and absolutely that puts us in weaker position today. >> one of the concerns i have, or things i applaud listening to certainly the president's state of the union speech, and i see some elements in this budget, is the effort to in-source. i would like to bring your attention to something that i and members of this committee, some of the members of this committee, have that we believe can be helpful to us in this time. a critical element of our economy is the severe downturn in the real estate market that our country faced and is still reeling from and studies have shown that more than $1 trillion of commercial real estate loans will be maturing in just the next few years, and so some of us are concerned just as we saw our home mortgages, these

borrowers can't secure other funding options, equity to replace debt, then when the loans come due commercial properties around the country could be in serious trouble. in 2007 the irs issued a ruling called notice 2007-55 that further compounded the problem at a critical time right when we were in the midst of this. which is why senator enzi and i introduced the real estate investment and jobs act and it's a common sense approach that takes some modest steps to reform the foreign investment and real estate property tax act in order to reduce barriers to foreign investment that we can no longer afford. i don't think in the global economy which we live in, this makes sense in the national interests of the united states and our economy. can we work with you to ensure that our tax laws are not opposing unnecessary barriers to much needed investment during these challenging times and does

treasury have any thoughts on whether the law may cause foreign capital to go to similar investments in other countries instead of the united states? >> thank you, senator. let me just respond briefly. i will be happy to respond in more detail separately. we have two objectives we bear in mind as we look at these kinds of proposals and reforms. one, we want to make sure investors are really on an even playing field, are really treated equally. we don't want the system to favor foreign investors at the expense of u.s. investors for obvious reasons. we have to be careful as you know when we look at any reform of how we will pay for it. if it will cost money, we have to figure out how we're going to pay for it. so with those two constraints, of course, we will look at any proposal and happy to talk about it with you in more detail. >> thank you. >> thank you, senator. senator kyl? >> thank you, mr. chairman. because time is short here, let me do what some of the media people call a lightning round, if i could. i think these questions, at

least some of them, can be answered yes or no. first has to do with fairness which the budget talks about. do you think it's fair that the top 1% of earners in the united states pay just about 40% of the income taxes? >> i do because i don't see how the alternatives are fair, are more fair. >> okay. do you think it's fair that, this was "wall street journal" figure in an editorial this morning which you probably saw, the top 3% pay as much as the other 97% of taxpayers in income tax. >> again, i do, because again, life's about choices and alternatives and if they're not going to pay it, then you have to find the resources elsewhere in asking middle class families to pay more or cutting the benefits to middle class retirees. >> okay. that brings me to the third one. is it fair that the bottom almost 50% pay no federal income tax? >> as you know, i don't think that's a fair description of our current tax system. those millions of americans pay

payroll taxes. >> yes. and the payroll taxes are supposed to pay for social security, are they not? so there is a specific benefit allegedly resulting from the payment into the system, but the president proposes that we reduce the amount of payroll taxes paid into the system with the payroll tax holiday extension, is that not correct? >> well, only temporarily and of course, that temporary shortfall is made up by transfers which automatically happen. >> and 50% of the people that don't pay federal income tax then are not contributing to the general revenues that are making up for the lost payroll taxes, right? >> well, maybe another way to think about this is the, you know, some people say we're a large insurance company attached to an army. the biggest drivers of spending are medicare, social security, medicaid too. >> that's all true. that's beside the point of my question. i'm trying to talk about fairness here. if you're going to get off on medicare and medicaid, maybe you

can help persuade some on the other side of the aisle that addressing those entitlements would be a good way for us to help reduce our budget deficit. >> i agree with you that we have made unsustainable commitments in medicare and medicaid. we're going to have to slow the rate of growth in those commitments. >> one of the proposals in the budget, was it not, that there be somewhat of a premium increase means tested for medicare part b and i think d, is that correct? >> i think you're right. you have a modest set of changes that would in effect increase the share of those benefits paid for by the most fortunate americans. that's correct. >> let me ask a couple other questions, get to this question of how you do tax reform. you talked about lowering rates, broadening the base, eliminating the special purposes and so on. and the president had a good statement in the state of the union, talked about an economy where everyone gets a fair shot

as their fair share and everyone plays by the same set of rules. that's the basic premise here. how does the proposal in the budget meet this test when it eliminates the manufacturing deduction for certain tax payers, but then doubles it for certain other taxpayers, but not for other manufacturing? >> good question. i'll be talking about this in more detail. >> obviously not everybody is going to be playing by the same set of rules there in terms of tax charges. >> good and fair question. let me set the basic framework we think should guide corporate tax reform although we will say more in the next couple weeks. we are going to propose a broad reform that will lower rates, broaden the base and eliminate and wipe out a very substantial fraction, dozens and dozens and dozens of special tax preferences for businesses. >> while creating a whole bunch of new ones. >> no. no. while preserving a very limited number that are targeted against really one core objective which is to make sure that we're improving incentives for designing, creating and building

stuff in the united states. >> okay. let me stop there. we're talking about picking winners and losers. you would increase or create tax incentives for building advanced technology vehicles at the expense of other kind of vehicles. i shouldn't say at the expense of but not for other kind of vehicles, is that correct? >> well, you're putting me in a difficult position because i've said in the next two weeks we will lay out a more comprehensive set of proposals here and i know we will have a chance to debate those then. you're right to say we are proposing to preserve a very limited number of core incentives for investment in the united states. we're doing that because we think there's a compelling economic case for doing that and we're going to eliminate dozens and dozens of specific corporate tax preferences. we think that trade-off is a pretty -- >> we look forward to -- excuse me. i just have five seconds left. treasury department is where i get the statistic or the citation for the proposition that the people that would be hit by the so-called millionaires' surtax, according to your definition, 80% of whom

are business owners. is that a correct statement? >> i have to go back and look, but again, i want to emphasize the following. it is roughly 2% of tax paying individuals and slightly higher, only slightly higher portion of tax paying small businesses. now, again, if we don't do that, though, who are you going to ask to bear the burden? >> are these job creators or not? are these the people that hire other people? >> another way to think about this is look -- >> well, yes or no? >> yes, they will apply to a small -- >> can i just ask you one last thing. >> small fraction. >> is it true that the majority of businesses especially coming out of a recession are created by -- majority of jobs are created by small businesses? >> you are right. the small businesses create a substantial fraction of jobs but again, we're proposing changes that affect a tiny fraction of small businesses and look at the record of job creation by small businesses during the period, we have a recent experience of this, which is the period in the

second half of the '90s when they faced similar tax rates to what we're proposing and the record of job creation was very, very good. >> mr. secretary, thank you for your service. couple questions on your opening statement. in your statement you talk about productivity gains and increased savings. however, the most recent data show that the productivity gains are declining and we actually went not negative but we had a decline in the savings rate over the last two months. the trend is not as you described in terms of productivity or savings. is that correct? >> you're right about the last few months but i think if you look at the broad pattern since the recovery began, both those statements are true and that's very important because again, we were living beyond our means, not saving enough, borrowing too much, and productivity growth in the united states through this

recovery in contrast to what we have seen in germany, for example, has really been pretty strong, encouragingly strong. >> the other thing is the assumption that you've made a couple times in answering questions, that if we were to not get the revenue from raising rates on this 2% that you describe, that we had no other option but to cut medicare or those programs that benefit our retirement programs and our safety net programs. and i want to challenge you on that for a minute. the gao last february released a report outlining duplication, they will issue a report at the end of this month on the second third of the federal government and according to my calculations, we could save $100 billion a year eliminating duplication in the federal government. there's no proposals in this budget to actually do that.

i'm very complimentary of what director-designate lance has done but there's also $100 billion in fraud in medicare and medicaid. that's $2.4 trillion. so it's not right to assume that we couldn't run the federal government more efficiently and that the only option is to raise revenues. the size of the federal government is twice the size it was ten years ago. and the question that i would have for you, does the administration not truly think that in all areas operating the federal government that we could become much more efficient, especially, for example, in fraud or duplication, that we couldn't achieve significant savings that would go a long ways towards eliminating or lessening our budget deficit and eliminating the amount of money we're going to have to borrow to cover that? >> i completely agree with you, senator. you have shown great leadership in this area.

there is substantial room across the financial government to use taxpayers' resources more wisely. the president agrees to that. we are committed to that and we are happy and would like nothing better than to find better ways to achieve those savings and we'll keep doing that. but reason i said what i did is partly because of the choices we saw made in what we call the ryan budget, the budget that republicans embraced last year, because that was a budget that showed what you have to do if you're not going to raise revenues or taxes. what that budget showed is if you're going to reduce deficits to the level you need to without raising revenues, then you have to do very, very deep cuts in benefits in those programs. now, you're right, there may be more savings we can get, but i think it's generally correct, if you're not going to find this 1% of gdp in revenues, you have to find it in cuts across national security, medicare benefits, medicaid benefits, low income

programs and infrastructure, education type things, and that will force us to contemplate cuts that we think go beyond what makes sense for the country. >> well, you're talking $150 billion a year. i'm telling you i think if you and i sat down, we could find $150 billion a year that don't produce an economic multiplier greater than one, that we in fact could find efficiencies and effectiveness changes in the federal government that would not require us to do this. now, i'm on record as saying we need to have tax reform so my next and final question to you is most people agree that if we were to lower the rates and broaden the base and significantly eliminate the $30 billion a year that the very wealthy in this country get through tax credits and breaks, that we could, in fact, markedly improve our economy. so my question is why haven't you -- you're saying you want to

build -- why haven't you come out and said here's what we did. the simpson-bowles outline, there have been several proposals. why not put something on the table and say let's do this before the end of the year. let's do major tax reform and let's make it fairer, flatter and more effective. >> good question. maybe the most honest way to say that is that we took a run at trying to negotiate a framework like that with the republican leadership in the house over the course of the summer, as you know, at substantial political cost, and we found no basis for agreement on even the broad framework you said correctly was embraced by simpson-bowles and by the senate bipartisan committee, and without that willingness, without an indication by republican leadership, we're just trying to be realistic and what we're trying to do is trying to help

make the case why reform is so important, why reform is a better way to get there than just adding more -- but just realistically given the experience we had over the last year, we don't see the basis yet. maybe it will come. without it, we're not going to get the changes in health care spending that we all know is necessary because we just don't see realistically politically how we're going to get a meaningful progress on that front without the kind of balance we need on the revenue side. >> senator carper? >> thanks. let me just start off, senator coburn has raised again the idea of a grand compromise where democrats agree to some reforms with respect to entitlements and republicans agree to some additional new net revenues. i think -- i thought this for 18 months, that's what we ought to do. i think there are a number of us here, democrat and republican, who believe that's the right path to take. i hope we can get back on that path later, maybe later this year. i want to thank you for your

service and for the work that you're doing not just here but abroad, in europe, as they work through their difficulties and hopefully toward a good end. the administration, we had a chance to chat just a little bit before the hearing began, and i mentioned the president under current law has recission powers, the president signs an appropriations bill into law, he or she can then send a recission message to rescind or reduce spending in certain line items under current law, the congress can or cannot vote on that, if they choose to ignore it, it goes away and what historically we have done is ignore it and those proposed recissions go away. in 1996, the congress passed president clinton signed as you'll recall legislation that said that president cannot only line item veto appropriations, but also entitlements and also tax measures. and that those would become effective unless two-thirds of the house and two-thirds of the

senate were to override that, those actions by the president. that power is made permanent for the president in the '96 legislation. what a number of us, senator mccain and others, including people sitting here to my right have authored and co-sponsored and now passed in the house is legislation to say let's try for four years, four-year test drive, give the president the authority to go through an appropriations bill or omnibus bill and pick out certain line items that we would have to vote up or down on. we could vote it down with a simple majority in the senate, 51 votes, or vote it down with a simple majority in the house, 218 votes. but we'd have to vote on it. and if defeated, then it goes away. so we think it provides some extra accountability for the president and frankly for the congress. try it for four years, see how it works, if it helps, good, maybe we can make it better. if it doesn't work, then we stop

doing it. i appreciate the administration's support for this and i just wanted to go on record for that. i don't know if there's been any discussion here on clean energy tax policy but i just want to mention one thing. a lot of other countries in the world derive a considerable amount of electricity from the wind. some of that's on land, some of it's off their shores. we don't derive any electricity from the wind off of our shores but there's a great opportunity for us to do that. there are some people who think all we need to do is to extend a production tax credit wind production tax credit and that will help incentivize the deployment of offshore windmill farms off of maryland or delaware, new jersey or north carolina, all the way up to maine. what we've learned is wind production tax credit doesn't get the job done, and nobody's going to build a windmill farm off of any of our coasts in the united states until there's an investment tax credit that will help out. senator snowe and i have offered

legislation that provides for an investment tax credit, 30% investment tax credit, and it would inure to whoever deploys the first 3,000 megawatts of electricity that are generated off of our shores. so it's not one year, two years, three years, four years, but it would basically, first come, first served. if you get your windmill farm out there and producing electricity, whoever comes up with the first 3,000 megawatts, you get the tax credit. would you just give us some reaction to that in terms of whether that seems to make any sense, whether that's consistent with where the administration wants to go? as it turns out, the cost of that is just i think a couple billion dollars a year over ten years, it's not a heck of a lot of money because it goes away. >> senator, i would be happy to talk to you in more detail about that and look at that carefully. there are different ways to do these things but we agree that we want to make sure that we are preserving even after comprehensive tax reform, a set

of well-designed special incentives for improving not just energy efficiency but our use of renewable energy resources. absolutely we support that and are happy to work with you on the most effective way to do that. >> thanks very much. can you give us lastly a quick update on t.a.r.p.? how are we doing in terms of getting our money back with interest, without interest, where are we losing and gaining? thank you. >> we are doing really exceptionally well by any measure. the cbo estimates the total cost of t.a.r.p. are in the $25 billion range. my suspicion is over time that ? >> high. i think the bank part of the program, the banks have already yielded about a $20 billion return to the taxpayer, positive return to the taxpayer. we have a lot of risk still, a lot of losses in the investments we made in the automobile industry to help facilitate that restructuring, and other pockets of the programs, but the costs

are vastly lower than what people thought, hundreds and hundreds of billions of dollars lower than what people thought. we've got most of that money back already and we're in a very good path to get -- show a very high return. i think if you look at it across all the programs, the feds, the fdic's, even with the cost in the gse, alongside t.a.r.p., most independent forecasters think the overall cost of this will be very small, a tiny fraction, for example, of what the country paid to resolve a much smaller crisis, the s & l crisis, which cost us 3.5% of gdp. >> all right. thanks very much. >> senator kerry? >> excuse me. senator cardin. >> thank you, mr. chairman. first, secretary geithner, let me thank you. thank you for your presentation, thank you for your service.

i agree we need to have a balanced approach, whether it's dealing with our budget deficit as the administration's budget deals with revenues and spending which we have to do both. it also deals with deficit reduction but recognizing that we're in a recovery and that we need to make investments in education, job training, and infrastructure, which i agree with. i want to concentrate if i might on the middle class, how important it is to grow the middle class. i look at the numbers and see a shrinking middle class and wonder where consumers are going to be to buy the products we want to produce. i take a look at the administration's budget and on the revenue side, everyone talks about the revenues that it generates. well, that's using a baseline that is current policy rather than current law, but use current law, the revenues actually would be a lot different. with current law, if we don't change it, the middle class is going to get socked. the tax rates will go up and the alternative minimum tax level