White House Briefing on President's Tax Plan | |
| June 30, 1997 | |
Press Briefing by Secretary of Treasury Bob Rubin, National Economic Advisor Gene Sperling, OMB Director Frank Raines, and Chair of Council of Economic Advisors Janet Yellen |
SECRETARY OF TREASURY BOB RUBIN, NATIONAL ECONOMIC ADVISOR GENE SPERLING, OMB DIRECTOR FRANK RAINES, AND CHAIR OF COUNCIL OF ECONOMIC ADVISORS JANET YELLEN The Briefing Room
10:45 A.M. EDT
MR. TOIV: Good morning. We have here to brief today on
the President's tax plan Treasury Secretary Bob Rubin; Gene Sperling,
the President's National Economic Advisor; Frank Raines, OMB
Director; and Janet Yellen who is Chair of the Council of Economic
Advisors. And Secretary Rubin will make a statement, and then
they'll be available for your questions.
SECRETARY RUBIN: Thank you, Barry. I'll make a very
brief statement and then all of us will be delighted to respond to
questions.
What the President put forth this morning, and you heard
a few moments ago, is a very strong tax cut program for America,
consistent with the principles that he has felt consistently should
guide tax cuts. This program was based on the work of the Democrats
reflected in the House Ways and Means Democratic alternative, and
also in Senate Democratic alternative, and based on the bills that
passed in both Houses.
The criteria that he believes should guide tax cuts are
fiscal responsibility, which, given that we already have a framework
that basically focuses on avoiding explosions in the second 10 years;
secondly, a fair allocation of the benefits to middle income people,
to working Americans; thirdly, promoting growth; and fourthly,
compliance with the budget agreement.
And with that, we would all be delighted to respond to
any questions you may have.
Q The President in his proposal today included extra
cuts in capital gains and estate taxes, as he said, to reflect the
Republican priorities. Can you explain specifically what the
President has reduced in the tax cut proposals he made earlier in
order to pay for those cuts? And also, can you explain in order to
accommodate what he himself said would be an increase in benefits
from the upper one-in-five percent because of those cuts, how does
the middle class benefit with this package compared with his earlier
package for the middle class?
SECRETARY RUBIN: Are you talking about the original
budget proposal? Because, remember, that had a net tax cuts I think
of $22 billion. So he didn't have to reduce other pieces to comply
with -- or to comport with the $85 billion net tax cuts that was
called for by the budget agreement. As you remember, the budget
agreement $85 billion was a number that we very strongly felt was
affordable, given the economic condition of the country, which as he
said he tracks back to the program we've had in the last four and a
half years.
On the second question with the middle class tax cuts,
it was what?
Q To what extent are you -- how much are you taking
out of middle class benefits to pay for the estate and capital gains
tax increases that you're proposing?
SECRETARY RUBIN: I wouldn't look at it that way at all.
I would look at it very differently. If you take his program, which
I think is a very good program, and you compare it to either of the
versions -- the programs that passed in either House, what you'll
find -- I think you have the sheets -- is that you have a much more
substantial portion of the total tax cuts going to the middle three
quintiles, if you will -- middle income people -- and a much smaller
percentage going to the top quintile or the top one percent. I think
that, at least in my judgment, that would be the way to look at this
tax cuts program.
Q Secretary Rubin, you're saying that it's relatively
better, but the President is still going to support a tax cut package
that is weighted to the rich?
SECRETARY RUBIN: No. I'm saying that he is supporting
a tax cuts program that is weighted predominantly to the middle three
quintiles and that the top -- I don't have it in front of me -- my
recollection is the top one percent under his program gets about two
and a half percent under the Senate -- actually, I do remember --
under the Senate gets about 12.5 or 13 percent, and under the House
bill gets 19 percent or 18.5 percent.
Just go back the other direction. The Senate -- House
Ways and Means give the top one percent about 18.5 percent; the
Senate gives the top one percent about 12.5 percent; and he gives the
top one percent 2.5 percent. What he has done is constructed a tax
package that is very predominantly oriented toward that middle three
quintiles.
Q Mr. Secretary, there is, obviously, a
counterproposal to the House and Senate plan. Now we go to
conference. Can you walk through what you see now as the major
disagreements between what the President gave us today and where the
Republicans are, and also your thoughts on how those might be
resolved?
SECRETARY RUBIN: Let me start with the last part of the
question and then go back to the first part. I think the question on
how they're going to be resolved is through a process of working
together in a bipartisan spirit. And as the President said out on
the lawn a few moments ago, the budget agreement was a product of a
good bipartisan spirit and it was good for the American people. It
created a good framework, a good tax framework, one that we think is
very much consistent with the principles I enunciated a few moments
ago. And now we would like to continue to work in that bipartisan
spirit, beginning with the various positions that we've all taken,
and the President begins with what I think is a very strong tax plan
to reach a bill that is good for the American people, that Congress
can pass and the President will sign.
In terms of the differences, yes, I can go through some
of them. We've actually outlined them in -- or at least we've
outlined them in the form of criticisms or comments on the House and
Senate bills in letters that we have released publicly.
We have no indexing; the House bill has indexing. We
have no corporate capital gains tax cuts; the House has corporate
capital gains tax cuts. We have a broad-based capital gains tax
cuts, but as you can see, it's a lesser cut. We have a very good
program for entrepreneurial people who invest on a long-term basis.
It's based on the Bumpers-Matsui legislation -- or legislative
proposals, I should say, of some years ago, and what it does is it
gives a substantially lower rate -- 75 percent of the otherwise -- 75
percent exclusion, if you will, with respect to capital gains for
patient investors, people who invest five years or more in companies
with market values of $100 million or less. That is a very good
capital gains tax cuts for a part of the market that in our judgment
is least efficient, and therefore, we think is best designed to
promote economic growth.
In terms of some of the equity issues, we would put the
child tax credit totally before the earned income tax credit, which
is what the Republicans have done in prior bills but not do in this
bill. And the failure to do so has highly injurious consequences on
low-income workers. And as you know, all people at the EITC are
working people.
On the estate tax, we have special provisions as per
Senator Daschle's proposal with respect to family-owned farms and
small businesses, but we do not raise the uniform deduction.
And those are the -- and very importantly and perhaps
most importantly, we have the President's proposal with respect to
higher education, which are both middle class tax relief and are
incentives for people to either extend their education, or if they're
already in school, stay in school. And neither of the Republican
bills has proposals that, as required by the budget agreement, are
consistent with the President's proposals.
Q -- saving accounts for college in yours?
SECRETARY RUBIN: We do. What we did, Rita, was to take
the child tax credit and provide that you get a $500 child tax
credit, and then if you wish you can take that credit and put it in a
savings -- a back-loaded savings account for education, and you can
take up to an additional $500 of your own money -- in other words, a
matching $500 -- and in addition, put it into that back-loaded IRA,
is about what it comes to -- a back-loaded IRA for education. We
think that's a very sensible and sound program.
I did omit, by the way, from the differences between
ours and theirs -- we, as you may remember, in the budget agreement,
in the letter, the leadership in that letter committed to work hard
for brownfield, for the D.C. program that we had, for welfare to
work, and for a number of other provisions which we think are very
important, particularly in the urban area. And we have them in our
budget; for the most part, they do not have them in their budget --
I'm sorry -- in our tax cuts; for the most part, they do not have
them in their tax cuts.
Q Mr. Secretary, under your plan, what would be the
top capital gains tax credit?
SECRETARY RUBIN: A touch under 28 percent. You take
the 39.6, you take a 30-percent exclusion and it gets you -- what --
to 27.7 I think. Is that right. Yes, 27.7
Q Mr. Secretary, the President says that the
Republicans' proposal threatens to explode the deficit. Can you tell
us more about that, and what specifically this proposal would have on
a balanced budget?
SECRETARY RUBIN: That's a very important issue, and we
were working on that as late as about 11:00 p.m. or 11:30 p.m. last
night, when I was on the phone with Carl Schultz in our office who
has done a lot of the technical work on this.
What is imperative to avoid, as the President said on
many occasions, is an explosion of the deficit in the second 10 years
that would get us back into the fiscal morass that we were in during
the 1980s. If you take the last three years -- and I believe it's in
the handout we gave you -- do you have the year-by-year in the
handout? You don't, I apologize. If you take the last three -- you
get the last three years of the program the President has proposed,
and the last three years of the House and Senate proposal, and you
just extrapolate out the trend line, what you will find is consistent
with what the Center for Budget Priorities has also reported, which
is both of those bills look as if they have very substantial
increases in tax cuts in the second 10 years.
And the Center for Budget Priorities, if I remember
correctly, on the House bill said about $700 billion, didn't they?
And on the Senate bill, well over $600 billion. For the President's
bill, the number is substantially lower than that. We're not
prepared to give you an official number yet. Analytically, it's a
very difficult number to get your arms around. But there's no
question our number is very substantially lower. And if you want to
look at dynamics, just look at the back-end-loaded IRAs that have no
income caps and see how they explode in the second five years versus
the first five years.
Q Yours go up, they just don't go up -- you're saying
there is a little explosion in the second 10 years with yours, it's
just not as big?
SECRETARY RUBIN: In the second 10 years our also will
go up, but it will go up -- we believe will go up on a reasonable
basis. A reasonable basis would be to take the second five years of
the 10-year period, okay, and figure that's a now fully phased-in
program for each of us, okay? So then, for a 10-year period you
would double that. You take the 165 net, because that's the second
five years. That gives you 330, and then figure you have 6 percent a
year -- or you pick your own number -- but 6 percent a year nominal
growth in GDP for 10 years, probably is about 70 percent if you
compound it, something like that. And it will give you a basis for
getting to sort of a reasonable number. On that basis, I believe we
would be below -- I believe we'll wind up being below that sort of
basis way of thinking about it.
Q Will their capital gains tax explode in the second
five, 10 years as well? Is that also a concern?
SECRETARY RUBIN: Well, the indexing certainly will
explode.
Q How much?
SECRETARY RUBIN: A lot. Our models are 10-year models,
and what we've done with respect to the second 10 years is done two
things -- one is, we've extrapolated from the last three years of
each of these three plans -- in the last year, the 10th year of our
plan -- let me give you a couple of numbers. In the last year of our
plan, the total tax cuts would cost $34 billion, okay? In the last
year of the Senate plan, they cost $41 billion; in the last year of
the House plan they would cost $41 billion. That's coincidental I
guess.
Q What year is this?
SECRETARY RUBIN: The year 2007. In the year 2006, our
plan would cost $32.6 billion; Senate $36.1 billion; House $36.1
billion. The year 2005, ours would cost $30.6 billion; Senate $32
billion; House $31.9 billion. You get a sense of how theirs in
ratcheting up as you get into the second 10 years, and it's that
ratchet up that has us very troubled.
Q Are the positions that the President spelled out
today non-negotiable? Because he was also talking about there still
being a process of bipartisan --
SECRETARY RUBIN: Oh, there's very much a process, as I
said at the beginning.
Q So he would move off of these positions?
SECRETARY RUBIN: Well, let me answer slightly
differently, if I may. I think what we have is a very strong
program. I think it's a program that meets the criteria that I set
forth in my own very brief opening statement. And as he said, you
have a House bill now, you have a Senate bill, you have a Democratic
alternative and you have a House Democratic alternative, okay? And
we all need to do is work together in a bipartisan basis and get a
good bill, and a good bill is one, I think, that would be consistent
with the kinds of principles he was talking about, including the
budget agreement, and that the Congress is comfortable with and can
pass and that he's comfortable with and can sign.
Q Mr. Secretary, on capital gains, would you explain
why you do your broad-based cut through an exclusion as opposed to a
rate cut, as the Hill does? And does it apply to prospective
investments or to existing assets?
SECRETARY RUBIN: Why do we do an -- exclusion is a more
typical way of doing and thinking about a capital gains tax cuts. I
don't know that methodologically -- it will have slightly different
effects than if you do it with fixed rates.
Q It changes ultimately the rate, correct? The top
rate I think you said would be 27.7 percent --
SECRETARY RUBIN: Yes, I think it's 27.72 percent, if I
remember correctly, something like that.
Q And does this apply to existing assets already
held, or only perspective assets?
SECRETARY RUBIN: It would apply to assets already held.
MR. SPERLING: I just want to point out, that's 27
percent for those in the highest bracket. For those in the 36
percent bracket, it will be closer to 25 percent; for those in the 31
percent bracket, it would be about 21.7; and the 28 percent bracket,
it would be 19.6; and in the 15 percent bracket, it would be 10.5.
So you would be taking 30 percent off the rate.
Q On the child credit, you brought the income limits
down substantially, particularly in --
SECRETARY RUBIN: Brought them down from where?
Q From where the House and Senate bills were. How
many families would be eligible for the child credit under your
income limits initially, relative to how many families would be
eligible --
SECRETARY RUBIN: I do not know the answer to that. If
we have the information I'll give it to you, and if we don't, we'll
get it for you.
Q Presumably, it's a lot fewer people that would be
initially eligible.
SECRETARY RUBIN: For the child tax credit?
Q Right.
SECRETARY RUBIN: Well, wait a minute, wait a second.
Frank just pointed out, there will be -- people above our limit don't
get it. On the other hand, because of our stacking, there will be a
lot of lower-income people who won't get a child tax credit, and
because we don't stack it that way budget we have the child tax
credit before the EITC, we'll be picking up lower-income families
that will get it that would not get it under theirs. So what we're
going to do is, there will be some upper-income families that won't
get it, but there will be a lot of lower-income families that will
get it under ours that wouldn't get it under theirs, which is the
observation Frank just made.
MR. SUMMERS: If I could just add on that, and we'll get
you the information -- our plan calls for expanding the income limits
and raising them in 2001 to $80,000 and $100,000.
Q Mr. Secretary, in the past you've expressed a lot
of skepticism about the capital gains tax cuts that the Republicans
are talking about would actually do much to boost economic growth.
What do you think your proposal is going to do? Do you think it's
really going to do much?
SECRETARY RUBIN: You're talking about the capital gains
tax cut? I think three things. I think that the Bumpers-Matsui
analog that we have in there is a very constructive measure, and I
think that it will help attract capital to that part of the market
that probably is least efficient. So I think that's a very strong
pro-growth policy.
I think that the broad-based -- yes, in my view,
broad-based tax cut -- and I think it's the predominant view amongst
academics who have studied this -- is that it is unlikely to produce
much economic benefit. On the other hand, as the President said, we
have constructed a plan that is drawing on the thinking of all
concerned to try to come up with something that we think is very
strong for the country and at the same time recognizes the views of
others. And it was on that basis that we put in the broad-based
capital gains tax cut.
The other thing I would say is I don't think there's any
question but the targeting as we have done with income limits, the
savings provisions, the child tax credit provisions, and the
education provisions will make those more effective in terms of
promoting growth, because if you give those kinds of tax cuts to
people with very high incomes it's not going to influence their
behavior; they would have done the same thing anyway, they'll just
get tax benefit for it. If you target it, then you will much more
frequently be influencing behavior by what you're doing and,
therefore, getting much greater impact on having people do the kinds
of things that we think will contribute to future productivity.
That's a very important point.
Q Are you confident the capital gains proposal that
you've now put forth is going to avoid an explosion in the deficit
years hence? I mean, I know initially there's this idea that it will
lead to an increase in revenues.
SECRETARY RUBIN: I don't think the capital gains tax
cut proposal that we have put forth is going to create a significant
outer-year problem. I think indexing creates a very serious
outer-year problem.
Q What happens now in terms of how you --
SECRETARY RUBIN: Let Larry amplify.
MR. SUMMERS: If I could just add, it's been around for
a while, but one crucial part of the administration's capital gains
proposal has been capital gains cuts for homeowners, which is the
asset most widely held by the American people is their homes. And
the proposal will for the vast, vast majority of Americans eliminate
capital gains tax on the sale of homeownership, which results in a
substantial increase in simplicity, because people no longer have to
keep track of the improvements on their home, and also represents
some increase in efficiency because it makes it possible for people
who want to sell their homes and invest their money in other assets
-- in stocks or whatever -- to do that without paying a capital gains
tax burden, and therefore promotes economic growth in that way.
Q Just trying to get a sense of what happens now
strategically. Do you go up and start to meet with Capitol Hill?
Does the President go out and talk about this to try to get a grass
roots thing going?
SECRETARY RUBIN: Well, Chairman Archer said publicly
over the weekend or Friday, I've forgotten which, that he had invited
the appropriate administration staff people to participate in these
pre-conferencing processes that will begin this week.
Q Who will do that?
SECRETARY RUBIN: It will be appropriate people from
Treasury. And then we'll head into a conference process. I'm not
sure what form it will take, Rita, but I think the key is that we all
need to work together in, as I said a moment ago and as the President
has said, in a bipartisan spirit to get to a bill that's good for the
American people. I'm not sure exactly what form that process will
take.
Q Can you go back to your February budget proposal
for a second? Other than, obviously, adding the estate and capital
gains tax cuts to the Republicans, are there other changes in the
core proposals that you made that are your priorities, anything
that's new?
SECRETARY RUBIN: I wouldn't say that we did it to bend
to Republicans, I would say that what we have done is constructed a
very strong program and in a bipartisan spirit we have accommodated
in some measure their view on broad-based capital gains tax cuts.
Actually, on the estate tax, I think what we did is take the Daschle
proposal, as you know. We in our original proposal, as you may
remember, deferred in a favorable way the tax family on farm and
small businesses. This has taken the Daschle -- which is, frankly, I
think a better proposal than the one we had.
Q But my question was, other than those two areas, is
there any new expanded or contracted --
SECRETARY RUBIN: Yes. I would say that the way we have
melded the child tax credit and the IRA concept to create what, in
effect, is a savings for education is a very useful addition. And
that really reflected work that was done in Congress, as you know.
Q To follow up on that, does the distribution table
on this --
SECRETARY RUBIN: Gene says there's some others.
MR. SPERLING: And then also, with additional -- this is
almost in answer to his first question -- with a larger tax cut
agreed to we are able to go from children 12 under to cover teenage
children as well. Also, since we're now looking at a 10-year level,
the $60,000 phasing out $75,000 has always been our proposal, but now
2001 under, as the -- reflecting the change in brackets, we would
have more people in terms of their income be eligible after 2001.
And then, on our HOPE Scholarship tax cut there are a
couple of changes. One is, one way that we've made it more
progressive, and this is working with Congressman Rangel and others,
was that now the Pell Grant does not offset the HOPE Scholarship.
Somebody can get their full HOPE Scholarship tax cut and their Pell
Grant, which is an improvement in progressivity for lower-income
students.
Secondly, we dropped the B- requirement, which we think
was good in terms of incentives for performance, but after long
consultations with colleges, we thought it would be too
administratively difficult. And then, reflecting some of the
suggestions made on the Hill, the first $1,000 we give in HOPE
Scholarship; the second is 50 percent of the next $1,000. And then
in five years, as it goes out, we would then make that -- you get the
first $1,500, and then again, 50 percent of the next $1,000.
We did not feel that the tax cut even as we proposed it
would have much of a problem on tuition inflation, but in working
with those who thought that might be a little more of a problem, they
all felt that this would be a good improvement and take away whatever
concerns there were.
Q Gene, while you're on the education package, would
you describe how and why you changed the $10,000 deduction to the
credit system you have in here now?
MR. SPERLING: It really is in many ways -- you can look
at it as a credit or just a 20 percent deduction. This was something
we actually considered when we first put it out, but just think of it
this way -- when it's a deduction, if someone in the 15 percent
bracket deducts 15 cents on the dollar, somebody in the 28 percent
bracket deducts 28 cents on the dollar -- this way we're saying,
whether you're in the 15 percent or the 28 percent bracket, you
deduct 20 cents on the dollar. Slightly more progressive, a little
simpler. So, again, we think that's an improvement towards
progressivity and, again, reflects our work with people on the Hill.
Q How does the distribution table of this tax cut
package compare with that of your February proposal in terms of
percent that goes to the top five percent?
SECRETARY RUBIN: They're very different proposals. We
can get if for you. You know, there's a dynamic in this that's worth
noting. Gene pointed out that there are a number of things in our
second five years that are middle income oriented -- the raising of
the ages, the changing of the HOPE so that you can get a total of
$2,000, and there were a couple of others that Gene mentioned. The
reason that we have room to do that in the second five years is
because we don't have the explosions of indexing IRAs, which we
favor, but IRAs without income limits explode. IRAs with income
limits would not have nearly the same effect. So we don't have the
upper income provisions that explode and fill all the room; by not
having those explode and fill the room, we're able to do more for
middle income people through the kinds of changes that Gene talked
about.
Q In raising the tobacco tax in this proposal, just a
few weeks ago --
SECRETARY RUBIN: We actually move that to the side of
this proposal, as you know.
Q Just a few weeks ago, the President sat on his own
members in the Senate not to vote for this, acquiescent to Ross's
request. So why is it better to have done it this way, proposing it
now, as opposed to letting his members vote on it a couple of weeks
ago?
SECRETARY RUBIN: Well, let me take a first shot and
then we'll ask Frank -- well, why don't you do it, Frank.
MR. RAINES: The proposal that occurred before we
concluded and the Republicans concluded was contrary to the
agreement. Since then, on a bipartisan basis in the Senate, they've
included a tobacco tax in their plan. And because they have included
that, with our agreement, we now have a bipartisan and both sides of
the agreement are agreeing that a tobacco tax can be part of the
proposal. And that's why we're including it in our proposal today.
So the big difference is, we can always change the plan
if both sides agree. If both sides don't agree, then we can't change
it. And that's fundamental to any agreement that you reach. And
because with our agreement today, the 20-cent tobacco tax increase we
believe is now consistent with the approach that we've been pursuing
on a bipartisan basis.
Q I though they were revenue raises --
MR. RAINES: No, it is not. What we have done is to set
aside the tax, and the funds will be included in a separate account
that will be available for appropriation for child purposes including
children's health. We've got two other of these special accounts in
the budget agreement -- one related to the Superfund and another
related to transportation. So this will be a third one that provides
that if their tax increase occurs, the money will be dedicated to a
particular purpose and will not count as an offset for the tax
package, and will not count against either the pay-go limit or the
discretionary cap.
Q Isn't the proposal that the Republicans are making
with the tobacco tax partly goes to offset other taxes? You
originally wanted the Kennedy-Hatch plan which gave it all to either
deficit reduction or children's health, is that correct?
MR. RAINES: Well, careful. We have always been
sympathetic to the possibility of using a cigarette tax for kids'
purposes. And the original Kennedy-Hatch proposal did that. And in
our proposal, we take 100 percent of the tax and dedicate it for
kids' purposes. In the Senate bill, they take part of the tax and
dedicate it for kids' purposes. So the big difference between us and
the Senate is how much of the cigarette tax is dedicated for kids and
kids' health.
Q Right, but I guess what I'm confused about, when it
first came up and Lott said no, this is a deal breaker, you stuck to
your word and killed it. Then all of a sudden the Republicans turn
around and decide that it's not a deal breaker anymore, they put
their own version of it in, buying off Hatch, and now you're left
with much less than what you could have got if you supported Kennedy
in the first place.
MR. RAINES: Well, actually, without getting into all of
the vote counting, I don't think it's the case that there was more to
be gotten then than is to be gotten now. I think that had more to do
with the timing of when this proposal came forward. But I don't
think we're getting less. In fact, I think what we're doing is
getting more -- we've got more money now in for kids' health directly
in the agreement and we've got additional funds under this 20-cent
tax that can be devoted for kids' health. So, net, I think we are
ahead, actually, of where the agreement was in terms of having funds
available for kids' programs.
Q From what you know, do you think there is any move
in the House for that 20 cents a pack increase?
MR. RAINES: It's unclear. It's unclear. They really
haven't had a good discussion on it there and we haven't -- as you've
seen in the Senate, the interest has grown over time as they have
looked at it, so I think we've got a good chance, given that we've
got it, the Senate has it in their plan, of having it in the final
package, particularly if it's devoted to kids' programs as opposed to
being used as a tax offset.
SECRETARY RUBIN: Frank said it, but I just want to
amplify one thing -- or emphasize one thing. We have $135 billion
gross; we have $85 billion net, and that has nothing to do with the
tobacco tax. As Frank pointed out this morning to me -- I had not
been aware of this -- there is one other place in the budget
agreement where there is provision for what would be a tax and would
be a related program if the tax were to be put in place, so this is
totally separate from our tax plan.
Q Does your tax plan also lay out the $50 billion in
tax increases?
SECRETARY RUBIN: Not tax increases. Raisers, loophole
closers and -- (laughter.) Is that what you're talking about? Yes,
loophole closers and no longer warranted subsidies? Yes. We could
certainly give you a copy -- we'd be happy to circulate them. In
fact, I've got them right here, I could read them to you, but it
would be an unbearably boring -- we'd be happy to distribute them.
Q Are they generally consistent with the Republican
revenue raisers?
SECRETARY RUBIN: Except where they're different.
(Laughter.)
Q There are Republicans who say that using the tax
code is not an efficient way to encourage education. Are you going
to be in a position to rebut those arguments, since at least
according to two books that have been published by members of the
Clinton team since the first term, you yourself were advancing that
argument at the time the tax plan was being crafted?
SECRETARY RUBIN: Let me -- one of those books I've
seen. That's the Dick Morris book?
Q Yes, and then I think Reich hints at this, I
believe, too.
SECRETARY RUBIN: I don't know. Let me comment on Dick
Morris. I don't want to comment on other people's renditions of
events, but this started as an idea that had a lot of problems
associated with it, but within those problems was the nub, if you
will,or a kernel of a very good idea. The President asked Gene as
head of the NEC to take this in its then existent form and see if we
could work through to get the good idea out of it and not have all
the problems that were associated with it. This was missing from
that book. And we all worked with Gene and came up with what I think
is a very good proposal.
It starts with middle income tax relief, which the
President, as you know, has long advocated, since the '92 campaign,
in theory -- not theory -- in light of the fact that through the
whole '80s and very early '90s, middle income people got left behind
as our economy improved. So the idea was middle income tax relief.
And here was middle income tax relief that also had, in our judgment,
an important incentive feature with respect to going to school and
staying in school.
Q Are you still expecting two reconciliation bills to
move separately?
SECRETARY RUBIN: To the best of my knowledge. Frank?
Q Still a commitment from the House and Senate to do
that?
MR. RAINES: Yes, and I think there was quite a bit of
discussion on the House floor by Chairman Kasich on that. So we have
two bills, we'll have two separate conferences, and we expect to have
two bills sent down to the President for him to approve.
MR. SPERLING: I just want to follow up one thing with
what John said. The first thing was, the $10,000 deduction came from
our Middle Class Bill of Rights proposal announced on December 15,
1994, which we all worked on and was actually proposed by Secretary
Bentsen at that time. So that was in our early packet. The question
that happened -- I was actually, I guess, deputy at the time -- but
the question that happened was that when we were putting forward that
proposal, Secretary Rubin and others were very concerned that we had
put it outside of our balanced budget agreement and that it would not
be paid for, and that it would be too expensive.
We went through and NEC process where, one, we made sure
we paid for it penny by penny, or dime by dime, as the President
said, and it was narrowed in important ways. So I think by the end
of the time we went through the process with the President, I think
our last meeting in the Cabinet Room I believe everybody was
together. So, as a lot of times, there are differences, but we came
together. At the end, I think there was pretty strong support across
the board.
Q -- make more sense if you wanted to encourage
education simply to write checks for that purpose, rather than giving
a tax cut that applied to people who didn't necessarily need --
MR. SPERLING: We should be totally clear on this. This
is both a program to encourage higher education and it is a tax cut
for hard-working families. So I don't want to run away from this at
all. The President believes a family making $50,000 that has two or
three kids in college at the same time can face a bit of a cash
crunch at that moment. And even though their children may already
have gone to college, the President wanted to give that family that's
doing the right thing by putting their kids through college, he
wanted to give them some tax relief. So there's no hiding from that,
this is a middle class tax cut program.
In addition, however, it is -- if you're going to give a
tax cut relief program, it's awfully good to have it have another
higher purpose, and this purpose was to make 13th and 14th grade
universal and help promote people going to college. And I think that
if you look at not only people going to college, but making it easier
for people to go to the college of their choice, to make it easier
for people to go full-time to school instead of having to divert
attention away from their studies, it has a positive impact. And
then we put this together with a $1.7 billion increase in the Pell
Grant proposal in this year alone; that is a 25 percent increase in
the Pell Grant program one year alone -- an increase from $2,450 two
years ago to $3,000 -- $550 per year for every year for almost 4
million people with Pell Grants.
So I think it is a middle class tax cut and it is part
of an overall comprehensive proposal by the President to make higher
education universal.
MR. RAINES: Let me add one thing on this which I think
is very important in looking at all three of these plans. All three
of these plans propose targeted tax cuts; none of these is a plan
that says an across-the-board change in the tax rates. All three are
targeted tax cuts. And I think, first, this is a very large public
policy success by the President to get all sides to focus on the
targeting.
So the real issue between these plans is do you like
what's being targeted. And if you compare our targeting to their
targeting, whether it's the purpose -- education versus the amount
that you give to estate taxes or capital gains -- or if you look at
the income targeting, we believe the President's plan is a stronger
plan for a targeted tax cut.
And so, as Gene says, we don't make any apologies for
having a program that is a targeted program. Ours is targeted;
theirs is targeted. The difference is on what purpose and on what
people are the benefits targeted.
SECRETARY RUBIN: Actually, just to clarify something --
actually, on the IRAs, theirs does not target on income basis. And
that is really worth -- are you talking about the education?
MR. RAINES: I'm just saying -- you have target by
subject; do you have an IRA, do you have a capital gains, do you have
an estate tax. And there's a targeting by people. We believe ours
is better targeted in terms of the subjects we choose -- our IRAs are
focused on education; theirs are open-ended -- and we also believe by
income that ours are better targeted because ours is focused on the
middle income, whereas theirs predominantly goes to upper income
people.
Q The President said that the IRAs was one of the
things that he was particularly worried about in terms of their
explosive effect. Can you explain how you've melded the IRA and the
tax credit and why yours doesn't explode --
SECRETARY RUBIN: What we said was that we would give
people a $500 child tax credit and that that would come before the
EITC, which is, as you know, itself an extremely important tenet of
our program -- and that, secondly, that if people wanted, they could
put that into a back-end-loaded IRA for education and they could add
to that anything up to an additional $500. The back-end-loaded piece
of that will also have that quality of increasing substantially in
the later years. On the other hand, it is subject to income limits
and it is only one IRA.
I think what you've got -- this is a little difficult to
report, perhaps, but I think it's an extremely important point -- we
believe in IRAs and they were in, as you remember, the President's
original tax cut proposals. What years were those, Gene, '94-'95?
MR. SPERLING: Yes, it was December '94.
SECRETARY RUBIN: December '94 we had an IRA, as you may
remember, and, in fact, we had back-end loading as an option. But
it's the absence of income limits, the proliferation of IRAs and the
absence of income limits, it's that combination in the Senate Finance
bill that creates the explosion in the outer years, and I think an
explosion with very little effect on saving for most of that because
it's going to go to upper income people who would have saved anyway
and all you're really doing is giving them a tax-favored vehicle to
put the savings in that they would have had anyway.
As I say, we believe in IRAs, just as Chairman Roth
does, but I think the question is, do you have income limits, or not.
And in our judgment, if you don't have income limits, then you're
going to be creating a great deal of benefit for people who would
have saved anyway and all of that benefit will get you no or very
little additional savings.
I think Larry wanted to add one thing to that.
MR. SUMMERS: There are, I think, two crucial points.
One is that for lower and middle income people, as the Secretary
said, saving is likely to be incremental, and so you're not giving up
revenue you otherwise would have gotten on taxable savings.
Second, the IRA proposals from the Senate Finance
Committee provide for conversion of existing IRAs into so-called
back-loaded IRAs. So you get a little bit of revenue in the short
run in return for the fact that those IRA assets that were eventually
going to be taxed down the road would no longer be taxable. And
that's what creates the exploding tendency, because you get a
one-time revenue increase in the short run with just leaving them
entirely out of tax in the longer term. And our proposals don't
include that.
Q Mr. Secretary, before you leave, could you explain
what exactly will the President veto besides indexing?
SECRETARY RUBIN: The answer to that question is that
we're focused on getting ourselves a bill and a good bill on a
bipartisan basis.
Q Can we just have one question on the economy in
general? New home sales out today, the supply at its lowest level
since '71. Has there been any growing concern in recent weeks that
the economy is overheating?
MS. YELLEN: Oh, I see a wide variety of indicators that
point to moderation in growth toward what I would regard as a
sustainable trend. The most important of those indicators would
include retail sales where we had a huge surge in the first quarter
and greater moderation now. And worrying about overheating, that's
something we should be quite vigilant about at this point, but I
don't see evidence of overheating. And certainly, looking directly
at inflation indicators, we've seen no evidence at this point of any
acceleration inflation; quite the contrary. Any precursors to that
that we might see with respect to compensation or adverse squeeze on
corporate profit, there's simply nothing to be seen on that front.
So we should be vigilant, but I don't see it.
SECRETARY RUBIN: Before you all go, let me just give
you a couple of numbers that may be helpful to you. Somebody asked
the question, I think, about IRAs and their explosive
characteristics. If you take what is called the American Dream
Savings Account in the House bill, it costs I think $30 million, if I
read this correctly -- virtually nothing -- $30 million in the first
five years. And it costs $13 billion in the second five years. It's
that kind of a dynamic which, if you then think into a second 10
years, which is troubling. If you take the Senate bill, it has an
education IRA with no income limits that costs $5.2 billion in the
first five years, and $19.3 billion in the second five years.
I'll give you another interesting example. The capital
gains provision in the House bill raises $2.7 billion through 2002
and loses $34.9 billion over the 10 years. Since it raises $2.7
billion in the first five years, what it loses in the second five
years is $37.6 billion. That gives you a sense of how explosive
these things can be and it's that kind of dynamic that very much
troubles us about the second 10 years.
THE PRESS: Thank you.
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