so part of the administration's budget is to concentrate as i see it on helping the middle class grow by using the tax code to provide some basically additional revenues in the hands of the consumers of america. secondly, we've mentioned several times education. education's the ticket for being able to participate in the opportunities of america. colleges are becoming out of reach, with the administration's policies as i understand it in this budget is not only to protect pell grants but also to deal with the cost of college education for american families. could you just comment for a moment from the administration's point of view, how important it is to help the middle class and grow the middle class? >> absolutely. i think you said it very well. let me just highlight a few things. basic tax framework we laid out is a very strong framework for the middle class. it protects the existing tax benefits they enjoy and expands

some for higher education, for example, to make it easier to afford a college education. the president's budget protects and preserves basic health care retirement security for middle class americans. that's critically important. we're asking americans across the economy to bear much more risk and uncertainty living in this global economy today, providing that guarantee of protection for health care and retirement security is critically important. the budget proposes a series of very important investments with reforms to improve the quality of education, access to training opportunities so americans come out of college or community college with better skills and the skills the economy most needs today. as you know, there are millions of jobs that go unfilled today because employers cannot find americans with those skills in engineering, for example, very important for us to fix that. the infrastructure investments the president proposes are good

economic strategy because they improve the competitiveness of american business but they also have the benefit of creating substantial employment opportunities for americans in construction who are still bearing most of the burden for the cost of the crisis. so those are just some examples. i think you're right, that's a good prism through which you should view these proposals, you should look at these against the alternatives and this package of things is a very strong framework of programs to help improve not just retirement security and health care security, but opportunity for middle class americans. >> i just want to underscore this point. if we don't help the middle class families, the recovery's going to be much longer than we want it to be. we look at the current housing issues which still are burdens to middle class families. a lot have not been able to get under the fact that they now have negative value in their

homes, and how they're going to deal with that. then we look at gasoline prices that are increasing which is somewhat -- it's having a major impact on confidence right now as every time we go to the gasoline station, we pay another couple dollars to fill up our tank. so all that i think is putting pressure and i would hope as we evaluate the budget that we use the prism of middle income families to judge and if we do nothing, it's going to be bad for middle income families. we need to get together and come forward with the type of framework that the president's laid out. thank you very much. >> thank you, mr. chairman. >> senator kerry? >> thanks, mr. chairman. mr. secretary, thank you for the terrific job that you're doing. important job and particularly with respect to some of our interests in other markets on a global basis, europe, china, elsewhere. i think senator kyl was, in questioning you going after the question of the impact of the

tax increase on the upper income people and small business, and i'd like to just give you an opportunity to be able to speak to that for a minute. what is the sort of downstream impact on small business and what would be the impact on small business obviously of getting a deficit deal of reducing the cost of capital and putting america on a stronger economic track? >> i should say by introduction in the category of stay tuned, in the framework of corporate tax reform proposals that we'll lay out next week, we will be very specific about what we think we can do to help protect small businesses from bearing an undue burden as we go forward. but the tax changes we proposed, we believe, would fall appropriately and overwhelmingly on those limited number of americans who are in the best position to bear that burden. and so as i said, and we have said many, many times before, i think senator grassley even used this number, it is true that

they will affect a portion of small businesses but a very, very small portion of small businesses. 2% to 3% roughly depending on how you measure it. and many of those businesses are not small businesses in any way most humans would think about it. they include in that definition partners in a law firm or principals in a private equity or hedge fund business. and many of those businesses may be small by some definition but earn very substantial amounts of money. again, we believe that we designed these carefully to make sure the burden falls on those few people in the american economy that are in the best position to bear that burden, that benefit most from the boom in the financial sector, and again, we think you have to judge these by the alternative. if you don't do those proposals, don't embrace those proposals, then you're going to have to find some way to raise resources

or cut benefits or spending on the rest of the american people and we don't see any need to do that. >> mr. secretary, besides our own budget choices and particularly the payroll tax in the next days, probably the next largest looming impact apart from our macro deal that we need to make before the end of this year, the biggest looming question mark on our economy may well be europe and other people. i'd like to ask you to speak to that and specifically, it's my understanding that there is something like $760 trillion or $770 trillion worth of derivatives out there in the market. what kind of risk does that pose to us in terms of the lack of knowledge of what's in there, particularly given what's happening in europe and greece, italy, so forth? >> excellent question.

let me just start with this. senator snowe referred to the fact that the recovery's been moderate, growth is only moderate, slower than the average of post-war recession, recoveries from recessions. it's important to understand why that's the case. growth averaged 2.5% since growth began. growth following a financial crisis produced by too much debt, too much building of houses, is always going to be weaker than following a typical recovery. there was no possibility that american economy digging out of the worst financial crisis since the great depression was going to grow like we did in the average of past recoveries, because as individuals bring down their debt burdens, and as you work through the huge imbalances we saw in construction, growth by definition is going to be slower than everybody would like. but on top of those headwinds and the additional headwinds of state and local governments cutting back, we've had the combined effects on growth of higher oil prices produced by

the arab spring, the catastrophe in japan and thailand later on and the crisis in europe. the crisis in europe so far has had a pretty substantial negative impact on growth here and around the world. european leaders, though, are making some progress. they've got a ways to go but they are starting to build more confidence around the world that they've got a plan in place that will at least avoid the prospects of financial catastrophe in europe, even though growth may be weaker and they still face years and years of difficult reforms, they seem more committed now to avoiding a catastrophe and implosion, blowup in europe that would have adverse impact in the united states. that's a very good thing for us because it means even if growth in europe is weaker than any of us would like, we're less likely to face the aftershocks of a sustained period of europe living on the edge of crisis.

now, the derivatives markets are still a substantial source of risk even with all the benefits they bring to people's capacity to hedge risk. they come with significant risk but because we have forced u.s. financial institutions to hold much more capital against those risks, not just in derivatives but more generally, we think the american financial system is in a much better position to withstand not just the pressures we have seen in europe so far, but could see from other shocks down the road. but the risk out there still in derivatives is one reason why we want to see the reforms that congress enacted in wall street reform allowed to take effect. we are working very, very closely with the other regulators to bring much more transparency to those markets. senator campbell has been a leader in this context. much more transparency to force much more of those markets on to standardized exchanges and clearing houses so there's more

transparency, better risk mitigation and we're making substantial progress in that direction but we've got some work to do. >> thank you very much, sir. thanks. >> thank you, senator. senator schumer? >> i will defer. >> senator wyden? >> senator cantwell. >> thank you, mr. chairman. mr. secretary, i appreciate that the budget has tax provisions in it for the new market tax credit and energy tax credit and low income housing tax credit, all things that i think are stimulative to the economy and important for economic development. i'm curious about two aspects of that. one, things that need to be done now and i'm assuming you're probably still a new york filer but states that have income tax -- >> i hope so. >> -- ability to deduct their

sales tax, their income tax from their federal liability, states that rely primarily on a sales tax. do you believe they should have the same benefit and do you think they should have certainty to that benefit? >> understand your concern about that question, fully understand it and i guess it's possible when congress gets around to thinking about comprehensive individual corporate tax reform, we have to look carefully at that stuff but we don't have any plans to change that now. but of course, i am sensitive to your concerns. >> do you think states like washington and florida and texas deserve certainty on whether they get to deduct their sales tax from their federal income tax? do they deserve that certainty now? >> i think it would be good for congress across the board to give not just states but businesses and individuals much more certainty about their tax treatment. that's one example of where certainty is good but there's lots of others, too. >> okay. because right now, we don't have that certainty and the fact that

these states basically watch other states get a deduction that is about $236 billion on the tax rolls as far as deduction, we're talking about $16 billion here, and we can't get certainty so it's a fairness issue, and the fact that every year we have to go through this, states like florida and washington and nevada and many others, this is about tax fairness and certainty and so when you don't give the certainty as we do now, that means people aren't buying automobiles, they aren't making those -- we have thousands, tens of thousands of people who itemize on our tax returns in the state. >> you make a case very well. i totally understand your concerns. happy to spend more time with you in thinking through those. >> well, if the administration would just advocate for certainty on this now, that would be a huge help. >> i'm a big fan of certainty. >> okay. then on the other extenders,

they've lapsed so we're still in this period. what is the administration doing to help us get these done now as opposed to waiting until a lame duck or next year? >> we're consulting very, very closely with your chairman of this committee, the ranking member and his counterparts in the house on how congress is going to deal with this. again, you're highlighting a very important question which is we've a tax system where we have really a tremendous number of temporary tax provisions, many of them have a lot of value. lot of justification for them. many may not anymore. but the value of all of them is undermined by the fact there's uncertainty on whether they will exist or preserve and it's no way to run a country, to leave a country like the united states with this degree of uncertainty year by year, month by month. it's already february 14th and again, i think this is another good example of where it's important for congress -- congress may not be able to solve all the deep like every problem facing the country now. this is a pretty easy problem to

solve. >> now. >> now. >> oeb. thank you. thank you, mr. chairman. >> senator schumer? >> thank you. first, i agree with senator cantwell's position on extenders. i think to let them wait means a lot of things won't happen. we know that people won't invest in for instance clean energy and windmills when they say maybe in the lame duck they will do it retroactively. i have something of great importance to new york, the mass transit deduction which you cannot do. people are losing out on their monthly deductions right now. they have lost them for january. they will lose them for february. if we can get it done and not have it done by march, it's only $240 million but it equalizes. so i hope you will heed senator cantwell's advice on that. i want to say first, i think the budget the president proposed is a very good budget on both the tax side and the spending side. i know there are many who say just cut everything. that's not going to make america

number one. deficit reduction's important. we all know that. but so's getting the economy going and to me, the number one thing that will keep our economy number one is having the best schools in the world. if we don't have the best schools in the world, we could have a zero deficit and we'll not stay number one. so the president's much more measured approach, particularly by using some of the money returning because of iraq and afghanistan and putting them into the places where we need to bolster the country, infrastructure, research, education, make eminent sense and i think they make eminent sense to the american people. many of our colleagues talk about let's cut everything but they say when asked about infrastructure, some of the tea party people to their credit, i have tea party people in new york who say to me infrastructure is not a government -- the government shouldn't do it. i ask them you think every highway and every bridge and every water project should be private? no, i don't mean that.

okay. i think it's a good thing. i would like to focus a little on the tax side here. again, imposing the buffett rule which is the president's moniker, i guess, he created the moniker, it's warren buffett's, repealing the amt, which is a threat to the middle class, all very good things. and it allows warren buffett to pay a little more in taxes and allows his secretary to get a permanent tax cut. it's a good principle, it works. we got to work the math out to see that it has some degree of balance. but there are a few misgivings i have as you might imagine, knowing me as well as you do. first i think you're being a little too patient. by that i mean the administration is characterizing many of the ideas as long range principles for a tax code revamp that probably won't happen until the president's in his second term. my view is why wait. why shouldn't we be debating these issues now?

i want to tell my republican colleagues it's my view that the buffett rule is going to be on the floor of this senate. we are going to debate it this year. now, maybe the same thing will happen on buffett, maybe the same thing will happen on buffett as happened on payroll tax. there will be such public outcry that some of our colleagues will say well, maybe we should go along as they just did even on the payroll tax not being paid for. i think we should debate the issue of surtax on the highest income people this year. we're going to put those on the floor and debate them, and let our colleagues and let the american people see where our colleagues are. and i'm not so sure that nothing happens. so that's one. step two, your budget doesn't provide any specific -- do you agree that it's a good idea to debate these earlier? >> i do. as i said, a lot of people think these debates don't matter because congress isn't going to

do anything this year and i think that's not a great approach to take. we have to have this debate. we're not going to be able to lay these choices indefinitely. we have very tough choices at the end of the year in the lame duck session. better debate them now. >> good. i agree. we might be surprised pleasantly about progress that we might make and particularly as the republican primaries end and there's a nominee and instead of that nominee moving as far to the right as possible, they got to try to move as far to the center as possible. there's a different political climate as well. so buffett rule, you didn't mention anything specific in your budget. you didn't outline what kind of specific buffett rule you would like. do you have concerns if the senate presses ahead with the buffett rule, we have one person who has dropped in such a bill. i co-sponsored it, senator whitehouse. i'm sure the chairman will have a great deal of wisdom on what to do here and the committee. would you have any problems with us putting some specifics on the

table? >> well, it always depends on the specifics but we're broadly comfortable with the approach senator whitehouse laid out in his proposal. now, you can do it different ways but no concerns about not going ahead with something in that broad neighborhood. >> good. okay. one final -- well, my time's up. okay. thank you. >> go ahead. >> okay. just one final point. this is a place the administration and i have disagreed and that is on 250,000 versus a million. i know the revenue concerns with 250,000. the problem is in my state, i imagine in certainly senator menendez, senator kerry, senator cantwell's state, there are a lot of people who make above 250 who aren't rich. property much more expensive. taxes higher, et cetera, et cetera, et cetera. and so if the administration believes 250 is the right cut-off for capping deductions and extending the bush tax cuts,

why isn't it also proposing a buffett rule that hits on the same rung of the ladder? why don't we just all don't we million dollar buffet rule? >> excellent question. well phrased. i'm familiar with your views on this issue. we talked about it a lot. but, again, we're trying to balance a lot of different competing considerations. and we're trying to figure out what is the most fairway given the fiscal realities we face to make sure that we can support the types of investments, benefits we think we need. that's why we're making this choice. but, of course, we understand and respect your proposal. >> thank you. >> thank you. >> thank you, mr. chairman. thank you, mr. secretary. it's been a long morning. i've tried to listen carefully on this comprehensive tax reform issue. and see if you can sort a little bit of this out for me if you would. you mentioned three times that we ought to have comprehensive tax reform.

that's a good thing. and, yet, when you look at the budget, it's corporate reform is in effect going to come now. that's what's been announced. and individual reform would come sometime later. so corporate reform isn't comprehensive. it's in effect, you know, piecemeal. and if you would, start with me in terms of how your view would get the country to comprehensive tax reform? we both agree that's what's needed. and there is bipartisan support for it. >> good question. and you're right to say that why not do it all at once. i think that's how it's going to happen. but what we're saying is that we want to provide a little bit more detail in terms of framework at this stage. i think that's the best way to get the debate going. i think you're right that ultimately maybe these things

have to happen. there is lots of good reasons for. that you spoke a lot about that and you've been a big champion of comprehensive reform. but part of what we're trying to do is to get people to think about a comprehensive approach to improving investment for the united states. we think one way to do that is to try to get discussion earlier on how to redesign the corporate tax system to support that objective. but i understand your point that ultimately these things have to go together. >> let me ask one other point and then kind of get a sense of what will come next. you also talk about, i think, the way you describe it, foundational principles. the foundational principles in '86 i think still have a lot of support here in the congress. bipartisan support. the idea was to cut breaks on business and individuals, keep a simpler code for both individuals and business, and retain progressive ti.

what i'm concerned about is if we're not careful we could end up with a different foundation in effect you would see changes on the business side. you've correctly describe you're going to clean out these business breaks in order to have the corporate side. and we could end up with more complexity as well. so like the last question, how do you see us getting to the foundational principles, as you describe them, that are so key in keeping them within that '86 approach with how we're going along the lines you've described? >> those are the right principles. we very much support those. in general, you want to clean up and eliminate, reduce, scale back a bunch of the special preferences, tax expenditures across the tax code. use those to make affordable a reduction in the overall marginal tax rates. preserve a basic level of

exclusivive ti for obvious reasons and leave yourself a system that is more simple, better for growth, easier for people to comply with. those are the constraints we should all live with in this context. i don't think we're going to put those at risk by showing -- you know, we have shown a lot of elements of what we think should guide the individual discussion. we're going to provide a comparable level of additional elements for what should guide the corporate proposal. it will be guided by the nice way you guided the parameters. >> the only point i make in terms of summing up, the key in 1986 was, of course, the presidential bully pulpit and that the executive branch every single time out talked about how you had to fit the pieces, you know, together. i'm glad you said what you did that -- in the end, it's probably all going to have to come together. but we've got to get that message about two hours, you know, earlier.

we've been sitting here for two hours and hashing through all of the specifics in terms of corporate reform and how you clean it out and what would go first and the like. and absent somebody particularly at 1600 pennsylvania avenue with all of you that are out and about, you know, the country, it's going to be very hard to build it here. i think we've got a lot to work with. chairman baucus and camp clearly want to move in this direction. but two hours in we finally got to the key point which is we're going to have to bring this together. we have to bring it together around 86 principles. i hope you and everyone in the administration will start using that bully pulpit. that was the key in '86. >> i agree with that. i think you made the point right. can i just say one thing, mr. chairman, on this? >> absolutely. >> you know this very well, senator, better than i do. our challenge here is much greater than it was in '86.

because the scale of our fiscal problems are much greater. and we don't have the luxury of offering people a substantial tax cut to individuals or do something that doesn't raise revenues overall so we can contribute to the deficit. we don't have that luxury now. we don't have the ability even with all the unpleasant features of our tax code today, it is a, in many ways, a cleaner, less -- i guess i don't really want to go there. >> i don't think you want to call this system cleaner. >> i was going to make a point. in the '86 act, as you know, it was possible at that point to provide individuals at least at the first stage of that reform a very substantial net tax cut. now president reagan to his credit two years later took back about two-thirds of that tax cut because it was unaffordable. and the country today even though there's a lot of support for the president's proposals,

we face a, i think, a much more difficult political environment in the current context. i completely support you on the principles. you're going to have that happen together. we recognize that. i agree with you also that when congress is ready to move on this, we're going to have to get to looking at a much more comprehensive framework of reform. >> thank you, mr. chairman. >> thank you. >> thank you, mr. chairman. thank you, mr. secretary, for coming today. i appreciate your statements about support for tax reform. i think everybody here wants to get on with that issue and hopefully do something that will lower rates and broaden the base. but i just -- i'm still waiting for the white house to put forward a proposal on that. i think that it's, you know, it's been said here earlier. i think the proposals and the budget this year take us backwards when it comes to the issue of tax reform. you have tax rates coming in. you have the proposed buffet rule raising dividend and tax

rates. it strikes me at least if we're serious about tax reform that the administration ought to put forward a plan that would actually accomplish tax reform that, would allow us to move forward. now, there is one thing that i did want to ask you about and that has to deal with the proposal that qualified dividends be taxed at the same low rate as capital gains. that was in last year's budget. and, in fact, last year i think the 2012 budget is taxing qualified dividends at the same low rate of capital gains rates reduces equity allocation of capital. the budget this year, however, proposes a tax dividends as ordinary income which if you had to way will be top rate of 39.6%. so if you include the new 3.8% surtax included in the health reform, that means the top rate on dividends is over 43% of before you even consider in the

income is taxed at the top rate. such a high tax burden on dividends is going to be inefficient allocation of capital? >> i don't think. so one way to think about this, it helps explain why ultimately we need tax reform. as i said earlier, what we did is if you try to do a balance reduction plan and do that with a mix of spending and tax reforms and you're raising revenue on top of the current tax system, then you have to embrace a mix of things like what we proposed. but it's a good reason to think about the why it's good to do this for tax reform. again, we expect we'll get an opportunity to work with you on tax reform, particularly given the looming tax cuts at the end of this year. i think that the reason why we propose this in the budget is just for the crude reality that we face unsustainable deficits and we are proposing those changes and the tax treatment of dividend income for the top 2% me