THE WHITE HOUSE
Office of the Press Secretary
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
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?
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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