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THE WHITE HOUSE

                     Office of the Press Secretary
                           (Des Moines, Iowa)
________________________________________________________________________
For Immediate Release                                      July 17, 1999

                           PRESS BRIEFING BY
                NATIONAL ECONOMIC ADVISOR GENE SPERLING

The Briefing Room

July 16, 1999

2:15 P.M. EDT

MR. SIEWERT: This is embargoed until tomorrow morning at 10:06 a.m. It is on the record and for camera, and with that, Mr. Sperling, Director of the National Economic Council, will tell you a little bit about the Treasury study that was forwarded today to the President on the impact of the Republican tax plan.

MR. SPERLING: Over the last week we have pointed out, as many others have as well, that the Republican tax cuts are so excessive over the next 10 years that they consume all of the available on-budget surplus and leave no resources whatsoever in the on-budget surplus -- the non-Social Security surplus -- for Medicare or for increases in defense, or for critical priorities, and that as a result there would be no non-Social Security surpluses at all available to strengthen Medicare over the next 10 years; and that the cuts in discretionary spending would be --the cuts in such domestic areas as education, environment, health, veterans, agriculture, would be almost unimaginable.

If they were to close the gap between the administration and the Republicans on defense -- in other words, if they were to meet our defense number, they would have cuts of nearly between 38 and 43 percent in discretionary spending by the end of the 10-year period.

Tomorrow in the President's radio address, he will discuss what the impact of the tax cuts will be on second 10 years, and I think the conclusion is that the exploding nature of the Republican tax cut in later years is even more threatening to the long-term fiscal health of the nation and our ability to pay down the debt and meet our long-term challenges on Medicare and Social Security.

Indeed, the estimate from the Treasury Department of the cost over the second 10 years is approximately $3 trillion. Three trillion dollars in cost and $1.4 trillion in interest costs as compared to using that $3 trillion to pay down the debt. If you add up the $864 billion in the first 10 years and $179 billion of lost interest in the first 10 years, with the $3 trillion cost in the second 10 years and the $1.4 trillion in lost interest, you have a number over $5 trillion. Now, that is -- the interest there is compared to paying down the debt. So if one used that on spending or tax on any form of spending, you would also not be paying down the debt, so that is in comparison to the debt reduction.

But even if one focuses on just the costs in the second 10 years, it would be $3 trillion, significantly more expensive than even the $864 billion that is presented in the first 10 years. Why? Quite simply, their plan is designed to explode in the second 10 years. It is a tax cut plan in which the most expensive elements are not phased in until the very last year. So in their budget estimates over 10 years, you only see the full cost in the very last year. So almost simple math compels this tremendous second 10-year cost.

Now, the reason, before I get into details, the reason why this is such a threat to our long-term fiscal health and our ability to preserve Medicare and Social Security is that this is exactly the period between 2010 and 2020 -- this is exactly the period when Medicare becomes insolvent, when Social Security first comes under strain, and when we first see the challenges of the baby boom retirement.

Between 2010 and 2020, in that 10-year period, the number of Social Security recipients will grow by nearly 30 percent. The number of Medicare recipients will grow by over 33 percent. The number of Medicare recipients in this 10-year period will grow from 46 million to 61 million. Social Security, between 2010 and 2030, the ratio of workers to retirees goes from 2.1 to 1, to 3 to 1. So right at the time, right at the exact period of time when our country is truly facing the demographic challenge of Medicare and Social Security and the baby boom retirement, right at this period, this Republican tax cut would call for an explosive drain on our national resources. And for that reason, there is no way that the President could responsibly let this tax cut go through, and there is no way that he would not be forced out of basic fiscal prudence and responsibility to veto this Republican tax cut plan.

It's worth looking at some of the components that drive up this analysis in the second 10 years. A large chunk comes from the repeal of the estate tax. It was worth noting both the cost of this and the very small number of people this would benefit. Right now on the estate tax, $650,000 is excluded in estate on the unified credit, and it goes, because of increases in the balanced budget agreement, up to a million in 2006. For farmers and small businesses, the number instead of being $650,000 is $1.3 million.

Therefore, currently, less than 2 percent of estates pay estate tax. This estate tax does not apply -- or would not benefit -- would benefit less than 2 percent of current estates right now.

Because it is completely repealed only in the last year, at that point the cost goes to $46 billion in 2009. The cost in the second 10 years for this provision alone is $570 billion -- $57 billion a year average, or $570 billion.

To get a sense of how few people would benefit from this enormous cost, it is worth looking at the year 2009. In that year it is projected that 72,000 estates would benefit from this tax cut -- 72,000. That is an average tax benefit per estate of $633,000 -- 72,000, if you want to do the math, is less than one-tenth of one-tenth of 1 percent of all taxpayers. Less than one-tenth of one-tenth of 1 percent of all taxpayers would consume $46 billion of the tax benefits in 2009; less than 2 percent of all estates would get this $633,000 per.

The across-the-board tax cut again reaches its full effect only at the end of the 10-year period. The reason why -- and so in that sense, is again -- has an exploding cost, while it is approximately $400 billion in the first 10 years, it is $1.5 trillion cost in the second 10 years. So nearly $400 billion in the first 10 years, $1.5 trillion in the second 10 years.

It is, again, worth remembering that an across-the-board tax cut for those in the upper income brackets for the most wealthy 05. percent who pay 39.6 rate, they are getting approximately four points off their taxes. For somebody in the 15 percent rate, it's 1.5 percent. So it is across the board in some sense, but not in others. It is actually -- gives far, far more significant relief to those Americans who are fortunate enough to make enough money to be in the top few percent of taxpayers.

In fact, 35 percent of households do not pay the income tax at this point and would not receive any benefit or relief from this measure.

The President has said from the beginning that what we are dealing with are projected surpluses, and when you have projected surpluses and you have existing, unmet obligations to Medicare and Social Security, the responsible path is not to simply dissipate projected surpluses. Surpluses have not even materialized. But as they come due, to pay down the debt and essentially save those funds to help our nation be better able to meet the challenge of Medicare and Social Security at the time of the baby boom retirement and the democratic challenge and the strain on Social Security. This Republican tax cut plan goes in completely the opposite direction; it dissipates our funds now and drains our national capital to deal with Medicare and Social Security at precisely the time when Medicare and Social Security are most under stain, at precisely the time the nation is facing the boom, the problem and challenge of baby boom retirement.

We are hopeful that as people think this through more carefully, more rationally, they will realize that it does make sense to first see how much we need to set aside to pay down our national debt, our national publicly-held debt, how much we need to preserve Medicare and Social Security, how much we need to make sure that our military is ready and our people are ready for the next century, and then put forward a responsible tax cut, one that fits within an overall budget framework and one that is much better targeted to helping working families save for the future and meet their daily needs.

Q Gene, when does the President plan to lay out his targeted tax cut? Is tomorrow mostly going to be going after Republican plan, or is he --

MR. SPERLING: We have a very specific tax cut proposal and I'm happy to give you the details. We laid out several of them in the State of the Union; we've laid out more details -- the USA Account proposal. But the President's plan includes $1,000 long-term tax credit; another $1,000 for helping Americans with disabilities who are trying to go into the workplace; a child care tax credit; the new markets tax credit that we've discussed, and the school construction tax credit the President is talking about --

Q Is there an overall --

MR. SPERLING: Yes, yes. And let me say, the largest piece is a progressive saving proposal, the USA Account. And it's worth noting that for families they receive $300 per person for families under $40,000 in the USA Account. So for a couple under $40,000, that's $600. Then if they put in more money it's matched for their savings. That is significantly more generous than the 10 percent tax cut that is being offered for the vast number of Americans who are in the 15 percent bracket, and it will be more generous for many in the 28-percent bracket.

The overall cost of our plan over 10 years is $250 billion. Now, just to be clear, the gross tax cut, if you added up all the tax cuts, you would have $320 billion, but we pay for $70 billion with corporate loophole closers and other provisions that we put in our State of the Union. So our net tax cut, the drain on the surplus that we would allow once we've done what we need to pay down debt and take care of Medicare and Social Security would be $250 billion.

Q Over 10 years?

MR. SPERLING: Over 10 years.

Q Apart from the Republicans just dropping their proposal and buying yours, how much room do you see for negotiation between the two?

MR. SPERLING: You know, I really believe that this is not a matter of just splitting the difference or looking at numbers. This is a matter of putting aside what is fiscally responsible and needed first, and then seeing how much is available. We believe -- first things first is not just a line, it's the right and prudent philosophy for governing.

We can say we have this great surplus, but in 2015 Medicare becomes insolvent. A young person today cannot be sure that Social Security benefits will be there in full for them; they're not projected to. So it's a temporary surplus, but when one looks at the long-term deficits we have, the responsible thing to do is to figure out how much we need to save to meet those challenges, how much we're going to need for other needs, and then see how much is left.

So I guess the way I would think of it is, is that we have a discussion and we find -- you know, we should have a national discussion about how much is needed for Social Security and Medicare, how much is needed to pay down the debt, how much is needed for education and military readiness, if the number is slightly different than ours, then -- and that's decided, then that's the right way to do things. But you really need to look at the overall budget. You can't just pick a number and then find out that you haven't left enough for military readiness or to strengthen Medicare solvency.

Q The Senate Finance Committee Democratic plan that's in the $300 billion range -- is that something that the White House would consider acceptable?

MR. SPERLING: Well, we clearly -- we think that we've put forward a very strong plan and one that we think is very sound economically because of its focus on increasing personal savings for those people who have the hardest time saving, but I think there are many positive things in the -- that seem to be developing in that alternative, and it is certainly closer to what we would think is the appropriate size of the tax cut.

So I think while we may not agree with its exact size or its exact components, it certainly is in a far more fiscally responsible amount than either of the Republican proposals, which are more than twice that much over 10 years, and as we've just shown here, at least in the House particularly have dramatically exploding costs in the second 10 years.

Q Looking at the proposal that you set out in the mid-session review, you proposed spending the on-budget surplus on tax cuts, including the taxes that you just talked about -- on increasing discretionary spending, on prescription drug benefits. If you look at the bottom line, the effect on the public debt, if you compare that to the Republican budget proposal, the public debt would be higher under the White House plan than it is under the Republican plan --

MR. SPERLING: That's not true. I mean, I can -- the publicly-held debt, the amount of external debt that this country has, would be down by hundreds of billions of dollars more under the President's plan than the Republicans' plan. This is not that complicated. We can figure it out right here. Let's give them -- and this is only for the sake of discussion -- give them -- assume that they took the entire off-budget surplus and paid down debt with it. We take ours -- we have a true lock box that really insists that the debt be paid down.

Then look at the on budget. We have $374 billion in Medicare, savings for Medicare that is debt reduction, where they have all of it going to a tax cut. So right there, you can see $374 billion more in debt reduction over the first 10 years than theirs. When you get to the second 10 years, you can see that the effect is dramatic. They would be draining a tremendous amount of resources from the federal revenues that could be going to debt reduction. So under any definition, the publicly held debt, which is the debt that we borrow when the country cannot meet its needs, it is the debt that affects interest rates, it is the debt that affects mortgages -- that debt is going down far more significantly in the President's plan than either of the Republican plans.

Q -- addressed the Roth plan's features and the merits?

MR. SPERLING: We have not gotten an analysis of their second 10 years. I think that there are many elements in there that could also have far larger costs in the second 10 years. Overall, the Roth plan is, again, of the size that does not allow for our nation to save virtually any of the non-Social Security surplus for Medicare. And I want to stress, Medicare was supposed to go insolvent in 2008. We had a year this year where it went from 2008 to 2015, but it often swings the other way. There's no guarantee that next year that 2015 won't move back the other way.

To know that Medicare is going insolvent in something like a decade, to know that, to know that right now there are already objections to many of the provider savings that were in the 1997 balanced budget agreement, and then to budget -- to not leave any of the non-Social Security surpluses for Medicare not just for next year, but over a 10-year period, right up to the degree of insolvency we think is fiscally untenable. And I think what would almost certainly happen is down the road when Medicare had to be dealt with, it would force very serious negative restructuring and cuts in Medicare, or even perhaps more likely, would put even more of an unimaginable squeeze on the basic priorities of education, health care, veterans, agriculture, and the other components in the domestic budget.

Q Would Roth get a veto, too?

MR. SPERLING: Something of the size of $800 billion or $900 billion that takes up the entire on-budget surplus, leaves nothing for Medicare and would leave dramatic cuts in the discretionary areas of education and health care is not something this President could responsibly sign. So, no, we would not sign, we would be forced to veto any tax cut that was of that magnitude, even if it was a tax cut that had provisions that we thought were favorable.

This is not a question of whether each of the elements -- you know, whether or not there are elements in this that are good. There are many things that you can do that can be favorable. One could build 100,000 new schools from scratch. One could do very attractive tax cuts. But the question is, can you afford it without squeezing out Medicare, without squeezing out Social Security, without squeezing out paying down the debt, without squeezing our defense and domestic priorities. And we do not believe you can.

Q You said that the Republican tax cut would result in unimaginable cuts in domestic programs. But the President, two years ago, wasn't counting on having any surplus to spend going into the future. Aren't the cuts basically very similar to one -- having to make under spending caps and not having a surplus going forward?

MR. SPERLING: We did the budget up to 2002, and I think that the caps were very tight in the 1997 Balanced Budget Agreement, and I think that we believe that they are -- were caps that one could live with if it was necessary to ensure the basic fiscal discipline of the country. But they were tight in the last couple of years. We presented a budget that met these caps for Fiscal Year 2000, but I think almost all of us who are part of the Balanced Budget agreement realize that the exceptional efforts we were making to turn our nation's fiscal situation around from one of exploding deficits to balance and even surplus -- that one of the reasons you were doing that was to lower your debt and your interest and be in a situation where interest costs and debt were not draining so much of the resources so that we would be in a better position to meet the challenges of education, health care and Medicare.

And I would say even that our current budget right now has -- is tight on the domestic discretionary side. We believe it's at a level that can be met, but to go to plan on a budget path in which you are dissipating the resources on the notion that you could cut across-the-board domestic spending by 40 percent 8 or 9 years from now is not responsible, it's unrealistic and it really looks like an effort simply to drain the government of resources and create a situation in the future, but there will be no choice but to have a pretty dramatic retrenching of key priorities in education, health care, and others.

And again, let's remember that there is a dramatic difference between taking a projected surplus and saving it for Social Security, Medicare or debt reduction, and giving out everything that's projected in a tax cut. Under one you are saving money and paying down the debt. If later the funds don't turn out, you're not going to regret that you saved for your problems. I've said this before -- a family has serious bills down the road and thinks that they're going to have a bonus every year, and saves their bonus for a few years to pay down their debt, isn't going to regret in year four if their bonus doesn't come through that they saved the money. But when you dissipate it on a tax cut, that money is not there. And if the projected surpluses do not come through, you're on a great squeeze. And it's very difficult to reverse because, as one knows, reversing a tax cut is called a tax increase. And that's not a very popular thing to do.

Q The Republicans basically responded to the Treasury numbers last night saying these are long-term projections. What would happen with the Balanced Budget agreement -- in the Balanced Budget agreement we cut taxes in '97; we didn't expect to balance the budget until 2000; we cut the taxes and the coffers of the Treasury filled up faster than we even expected. So why should we really worry about 2010, 2012.

MR. SPERLING: The response to that is not difficult on two fronts. First of all, this is not a complicated projection about what might happen in the future. They have a tax cut of which they fully implement all the cost in the last year. Let's just take their estate tax. It costs $46 billion when it's fully phased in in the last year. Say we assumed no inflation, no cost. You just go 10 times 46. That's $460 billion in the second 10 years. This isn't based on any projections, they designed their tax cut, so that within a 10-year window, you would only see one year of its true cost, so that over 10 years, it wouldn't look so great.

When you look at the second 10 years, it is going to be enormous. The fact that it's $46 billion in the estate tax in 2009 is not something we're creating, it's something that they are boasting about. So this is a tax cut that, by design, will explicitly drain excessive resources in the second 10 years, and this country went through a period in the '80s where people relied on the most optimistic scenarios. We've relied on conservative scenarios and things have turned out to be better than we thought.

So which decade do you think has worked out better fiscally for our country -- the '80s or the '90s? Isn't it better to be conservative and if you have more resources we can have these debates over what to do with it? Isn't the worst thing to do is to assume things will go well way out into the future and if you're wrong, put the country at fiscal risk.

Q If I could follow up, given how easy it is to project out, do you think that the House Republicans really want to pass this tax cut, or are they just setting up a marker to negotiate from?

MR. SPERLING: I have the benefit of having excellent tax analysts. I don't have psychoanalysts who analyze what -- (laughter) -- their intentions are, or perhaps if you're dealing -- or even a sociologist -- to do the group dynamic. I would say the following. I think there are a lot of people that would rightly be nervous about voting for a tax cut based on projected surpluses that would make it so patently clear that there would be very little, if any, resources left for Medicare for over a decade.

Q Roth seemed to try to be moving today in your direction on two fronts; he addressed the lowest income bracket by producing their taxes. He also seemed to take a step on including a bunch of loophole closures. Can we get a response today to that aspect of it that we can use today on whether or not Roth seemed to be moving in your direction, whether you're encouraged by that or don't care?

MR. SPERLING: I looked at his -- I looked at their provisions earlier today. We have not had a chance to analyze each and every provision. What I would say, however, is -- will repeat -- the main argument that we are making is that tax cuts of this size, to drain the entire non-Social Security surplus and leave so little resources to deal with Medicare and other crucial priorities, are fiscally irresponsible. And the fact that the composition of one may be a little worse or stronger than the other is not the heart of the problem here.

What we need to do is have a responsibly-sized tax cut that leaves room for Social Security, Medicare, education and defense. And then we can debate composition. In Chairman Roth's provision, it looks like he may have one provision that may be a little bit of a gesture towards our USA Account, but unfortunately, there are several other provisions there that are designed only to people who are already saving and who have already reached their limits on -- (gap in feed) -- for the year 2000.

And let's just remember, they can't meet the caps for this year. They aren't even willing to put up the offsets that we did with tobacco and other things to meet the caps for this year. They're saying that they can, essentially, have between 27 and 40 percent cuts, and then they can say, well, we'll just cut somewhere else for 100. But that's just a shell game. That's when you show one unimaginable cut, they just say they'll cut another unimaginable cut a little deeper.

I think the thing for them to do is to lay out their plan, show exactly what they would do on discretionary spending. They should show what their path is for education, for health care, for veterans, for agriculture, for fighting crime, for the military, over this path and see if people support not saving any of the on budget savings. I mean, the simple math is -- what is there, $794 billion? Okay. And there's a $996 billion surplus. So $794 billion carries with interest lost of something like $130, $140 billion.

So you know that they are basically using the entire surplus -- they're using the entire non-Social Security surplus for their tax cut. So anything they say is a reserve has to come from cutting even deeper into defense or other entitlements or non-defense discretionary. So not to use an old phrase, but they should show us the money, where they're cutting and where it's going.

Q If I could follow up on what you said. Given that their resistance to tax increases, which you've proposed as offsets -- the tobacco tax -- within the caps this year, do you think that given how the appropriations process is going that it's just becoming more and more evident that the caps would have to be raised this year?

MR. SPERLING: To us, the most important thing -- I apologize for having to repeat, but for us the most important thing is that we have an allocation of the projected surplus that is essentially focused on reducing the debt and preserving Medicare and Social Security. We have always said that when we can meet that test we can then talk about how the surplus can be allocated - for additional tax cuts. We're not saying that neither of those are needed; we're saying, let's first take care of our long-term deficits in Medicare and Social Security and our debt, and then see how much we have to allocate for the caps or for a tax cut.

Thank you.

END 2:53 P.M. EDT