Hearing of the Senate Finance Committee- Strengthening America's Economy Part I

Interview

Hearing of the Senate Finance Committee- Strengthening America's Economy Part I

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SEN. OLYMPIA SNOWE (R-ME): Thank you, Mr. Chairman. And thank you as well for holding this first hearing and the second session of the most urgent issue facing the nation's economy with respect to the erosion that we're all experiencing across this country. In fact, you know, I was talking to one of my constituents in Maine who told me that she holds three jobs -- one to pay for the mortgage, one to pay for the oil and the third to pay for gasoline to get to her other two jobs. I mean, I think that illustrates the drastic impact that this eroding economy has had on average Americans in this country.

Dr. Orszag, thank you very much for being here to help us shape the conversation and focus on the size and the composition of the stimulus package. And one of the overriding issues, of course, is to whom we give this tax rebate. And obviously, the greatest dynamic, the greatest influence is on those who are in a low-income category, low- to-middle income. And I noticed that in the Hamilton project report, your assessment of the past as well in CBO that the temporary tax rebate, you assume 50 percent is spent. That would have the greatest impact on the second quarter in 2008. How do we craft that tax rebate? Because I think that's in the essence of this debate. You have 22 million Americans who don't have an income tax liability that pay a payroll tax but not an income tax. You got another 20 million there -- (inaudible) -- who live on Social Security and so on but don't pay, you know, won't pay an income tax, so that's nearly 40 million Americans who might not benefit or will not benefit from a tax rebate. And this is going to be the essence and the underpinning of any effective stimulus that needs to happen.

MR. ORSZAG: The Joint Committee on Taxation in the document that they prepared for today's hearing goes through some of the ways of designing or the administrative issues surrounding a refundable rebate or a fundable tax credit. An important issue involved there is if you create a refundable tax credit for those who don't owe income tax liability, if you base it on 2007 returns, you could create a significant incentive for new, additional filers. That is, there are currently almost 30 million tax units that don't file a return. One way of mitigating that incentive is to limit the refundable tax credit to wage earners, most of whom already do file tax returns.

If you were not to do that, you probably would have to rely on 2006 returns, and that involves a different set of complexities involving people who move and outdated addresses and inability to use electronic funds transfer and a whole series of other questions, all of which is to suggest -- the Joint Committee on Taxation actually lays out quite nicely many of the administrative issues -- it's possible to do. You need to be careful about creating an incentive for very significant increases in filing. And if you limit it to wage earners, some of those tensions would be attenuated.

SEN. SNOWE: Well, Senator Lincoln has introduced legislation once again on the, you know, refundable child tax credit, for example, because -- (inaudible) -- goes to inflation eroding the base is (the ?) 10,000 (dollar) income which it triggers. And also, obviously, a -- (inaudible) -- could be used. It was passed in 2001 originally as well. So that could, obviously, be more tied to those categories and could be useful in designing this package, could it not?

MR. ORSZAG: That's one model, sure.

SEN. SNOWE: Well, obviously, the income level becomes key here in terms of who benefits from this tax rebate, and the sooner the better I would gather. So, I mean, you could design an income limit, would you not in the tax rebate?

MR. ORSZAG: You mean an upper limit?

SEN. SNOWE: Yes, yes.

MR. ORSZAG: One could do that.

SEN. SNOWE: Yeah.

MR. ORSZAG: You could do that.

SEN. SNOWE: Secondly, from what has been indicated that there would be another reset of more than $600 billion in adjustable-rate mortgages perhaps as early as this spring, what would be the impact again in terms of the size of this package? And secondly, is it important for us to pass a stimulus package so that we could offer blunt impact before that is implemented?

MR. ORSZAG: One of the things leading many analysts, and I'll just leave it at that, to conclude that we're faced with a period of economic weakness has to do with the burden imposed on homeowners from resets. The aggregate impact, though, is not as large as you would think in terms of impact on spending. But nonetheless, it is one of the forces, along with financial market turmoil, higher oil prices and other things, that raises concerns.

SEN. SNOWE: So it could be critical to pass this package in advance of any, you know, expected resets of mortgages to help blunt it even further in addition to the rate cuts that occurred today.

MR. ORSZAG: Again, the resets and other housing market problems are one of the forces leading to this elevated risk of recession.

SEN. SNOWE: Thank you.

Thank you, Mr. Chairman.

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