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Written Testimony of Secretary Geithner Before the Senate Finance Committee on the President's FY2013 Budget

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Chairman Baucus, Ranking Member Hatch and members of the Committee, thank you for the opportunity to appear before you today to discuss the President’s Fiscal Year 2013 Budget.

I.                               INTRODUCTION

Three years after the worst financial crisis since the Great Depression, our economy is gradually getting stronger.  The decisive actions we took to combat the financial crisis, combined with the President’s policies to restart job growth and support the economy, have helped lay the foundations for continuing growth.  Over the last two and a half years, the economy has grown at an average annual rate of 2.5 percent, exceeding growth in the year prior to the recession.  Private employers have added 3.7 million jobs over the past 23 months, including more than 400,000 manufacturing jobs.  Growth has been led by exports, which have grown 25 percent in real terms over the last 2 ½ years, and by business investment in equipment and software, which has risen by 33 percent during the same period.  

While the economy is regaining strength, we still face significant economic challenges.  Unemployment, at 8.3 percent, is still far too high, and the housing market remains weak.  The damage inflicted by the crisis presents continued difficulties for consumers and businesses alike.  In addition, the debt crisis in Europe and the slowing of major economies elsewhere in the world present potential impediments to our economic growth. 

The harm caused by the crisis came on top of a set of deep, preexisting economic difficulties.  In the years leading up to the crisis, the average middle-class family saw few gains in income, productivity growth slowed, and the fiscal policies of the previous Administration turned record budget surpluses into substantial deficits. 

In my testimony, I want to outline the President’s strategy for addressing these immediate and underlying challenges. This strategy entails a carefully designed set of investments and reforms to improve opportunity for middle-class Americans and strengthen our capacity to grow, combined with reforms to restore a sustainable fiscal position.  

The Budget proposes three specific steps to boost growth and secure the United States’ position as the most competitive economy in the world.

< >Improving access to education and job training, so that our workers are the best prepared in the world for the jobs of the 21st century.Promoting manufacturing and innovation, with a particular focus on research and development and jumpstarting advanced manufacturing, so that the United States remains the world’s most competitive economy and firms create well-paying jobs here at home.Investing in infrastructure, in order to create job opportunities now and enhance productivity in the long run.The Budget includes $141 billion for Federal R&D – investments that will promote the development of a variety of high-priority technologies, from next generation robotics to nanotechnology to improved cybersecurity.  The budget also keeps spending on the National Institutes of Health steady at $31 billion.Of this, the Budget provides $2.2 billion for Federal advanced manufacturing R&D, a 19 percent increase over 2012.The Budget proposes simplifying, expanding, and making permanent the Research and Experimentation Tax Credit, to provide a crucial incentive for businesses to invest in R&D.The Budget sets aside $149 million in the National Science Foundation, an increase of $39 million above the 2012 enacted level, for basic research targeted at developing revolutionary new manufacturing technologies in partnership with the private sector. 

The President’s Advanced Manufacturing Partnership invests in a national effort to develop the emerging technologies that will create high-quality manufacturing jobs.  For example, the Budget includes $21 million for the Advanced Manufacturing Technology Consortia program, a new public-private partnership that will develop road maps for long-term industrial research needs and fund research at universities and government laboratories directed at meeting those needs.The Administration also supports a range of investments and initiatives to bring about a clean energy economy and create jobs for the future, especially manufacturing jobs.  For example, the Budget provides $290 million to help meet the goal of doubling the pace of energy intensity improvements across America’s industries over the next decade, as well as funding to double the share of electricity that comes from renewable energy sources by 2035.

The President’s Budget provides funding for crucial infrastructure investments.  Specifically, the Budget proposes investing $476 billion over the next six years in our nation’s surface transportation system, which builds upon our proposal to immediately invest $50 billion to help workers get back on the job.  The savings achieved through our orderly drawdown of forces in Iraq and Afghanistan will pay for these investments, with the other half of those savings used to reduce projected deficits.The Budget also calls for the creation of a National Infrastructure Bank, a bipartisan idea that will leverage private capital with more flexible financing so that we can build worthwhile projects efficiently and effectively, based on their merits.The Budget also provides significant new investments for the modernization of public schools and community colleges so that those who attend have access to a safe environment with modern technology. 

Finally, the President has proposed a national effort through the $15 billion Project Rebuild to put construction workers back to work rehabilitating and refurbishing hundreds of thousands of vacant and foreclosed homes and businesses, which will also help counteract the effects of blight on home prices in affected neighborhoods.Allowing the high-income 2001 and 2003 tax cuts to expire;Setting a maximum 28 percent rate at which upper-income taxpayers could benefit from itemized deductions and certain other tax preferences to reduce their tax liability; andEliminating the carried interest loophole that allows some to pay capital gains tax rates on what is essentially compensation for services. 

These steps in the direction of a reformed system would reduce the deficit by about $1.5 trillion over the next 10 years and would set in motion the process of broader reform.

Corporate Tax Reform

Right now, the United States has one of the highest statutory corporate tax rates in the world, but the large number of loopholes and special interest carve-outs means that effective tax rates vary widely by industry, even by company, and allow some corporations to avoid paying income taxes almost entirely.  Even though our statutory corporate tax rate is among the world’s highest, the corporate tax revenue we collect, as a percentage of GDP, is relatively low for advanced economies.

There are too many tax provisions that favor some industries and investments and benefit only those who receive them, rather than society as a whole.  This creates problems beyond forgone revenue: it forces some businesses to carry a larger share of the tax burden than they would under a more equitable system, and it also hurts overall economic growth by distorting incentives for investment and job creation. 

Soon, the Administration will release a framework for reforming the corporate tax system.  This proposal will lower the maximum statutory rate, limit the ability of firms to shift profits to low-tax jurisdictions, eliminate tax expenditures that have no positive spillovers to society as a whole, and bring a sense of permanence to various provisions in the corporate income tax code.  In short, it will help level the playing field for businesses and allow the government to collect needed revenue while promoting economic growth.  The President’s Budget proposals, if implemented, would move the existing corporate tax code in the direction of these principles but would not eliminate the need for deeper reforms.

IV.Conclusion

In today’s testimony, I have outlined the President’s plan for addressing our substantial economic challenges through the combination of targeted investments, spending cuts, and tax reform.

In closing, I want to emphasize that bolstering economic growth in the long run and controlling our deficits both depend a great deal on us taking strong steps to support the economy right now.

A common mistake in the wake of financial crises is for governments to withdraw support for the economy too soon. Though recent economic data has been somewhat promising, we have a long way to go to fully recover from the worst shock to our economy since the Great Depression.  Failure to act in the face of these challenges is one of the biggest threats to our economy ahead in 2012 and 2013.  There are two key areas where Congress can provide immediate, meaningful support:

First, Congress should extend the payroll tax cut and emergency unemployment compensation set to expire at the end of this month.  These extensions will put more money in the pockets of American families at a time when they need it most and will help support the broader economy.  Private sector economists estimate that if these programs are not extended through the end of 2012, it will shave about half a percentage point from our GDP this year.  After a fourth quarter of 2011 in which government cutbacks took nearly 1 percentage point off of GDP growth, we cannot afford to further undermine our support for the economy.  And the savings to families are significant: if extended, the tax cut alone will save $1,000 this year for the typical household earning $50,000, while the extension of emergency unemployment insurance will prevent 4.5 million UI claimants who are looking for work from losing benefits, helping them and 8.3 million people living with them over the next 10 months. 

Second, we must continue to work together to support the housing market, whose weakness is a stress on millions of families and a drag on overall growth.  To this end, the President recently announced new policies designed to aid the housing market, including broad-based refinancing for responsible homeowners that would save the typical family $3,000 a year.  We are also working with the FHA and FHFA to take a range of steps to improve access to mortgage credit, and the FHFA also recently launched a pilot program to convert foreclosed homes into rental properties. 

Finally, Congress should consider the plan set forth by the President, first in the American Jobs Act, and now in the Budget, to create jobs and strengthen our economy.  The President’s Budget cuts taxes for American workers.  It cuts taxes for small businesses, so they can hire more people, and cuts taxes for businesses that add employees.  It protects the jobs of teachers, police, and firefighters.  And it puts construction workers back to work on much-needed projects.  There are 13 million Americans looking for work.  We have an obligation to them.   

Implementation of these short-term steps will help strengthen the economy as we enter the next fiscal year.  The President’s Budget for FY 2013 provides a path forward that will help our nation grow now and in the future.  These are important proposals.  They are balanced proposals.  And they will help make our economy and our nation stronger. 

Posted-In: News Politics Economics General

 

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