At a House Appropriations Subcommittee hearing on March 28, Treasury Secretary Timothy Geithner again defended the Obama Administration’s Fiscal Year (FY) 2013 budget and cautioned Republican leaders that cutting too much in their drive for savings will affect the ongoing economic recovery.
During the hearing, Geithner said the U.S. will reach the debt limit at the end of this year. Geithner does not expect the President will have to request a raise in the debt ceiling before the election, and any advanced notice to Congress will come “very late” this year.
In his testimony, Geithner spoke broadly on the U.S. economy saying it’s “gradually getting stronger” with an average growth rate of 2.5 percent over the last two years. However, “we face significant economic challenges” as effects from the crisis are still dampening growth, in addition to the ongoing housing and unemployment woes, Geithner said.
On the Treasury’s FY 2013 budget request, Geithner said it provides for greater investment in enforcement activities at the Internal Revenue Service (IRS) “that will contribute significantly to improving voluntary compliance with the tax code and closing the tax gap.” Geithner said the investment in enforcement activities will bring in an additional $1.5 billion in annual revenue “once fully implemented.”
Specifically, the budget for Treasury’s operating bureaus is 2.7 percent below FY 2012 enacted budget, excluding the IRS. The request also contains efficiencies and program reductions “that will produce savings of $286 million in FY 2013 and additional cost reductions in the years ahead.”
Question and Answer
Questions from lawmakers touched on entitlement spending and reforms, the House FY 2013 budget released by House Budget Committee Chairman Paul Ryan (R-Wis.), government sponsored entities (GSE) reform, NRA withholding procedures, the risk China poses as largest holder of U.S. debt, sanctions on Iran, CEO compensation, and on general tax reform issues.
GSE REFORM & FORECLOSURE CRISIS
Subcommittee Chairman Jo Ann Emerson (R-Mo.) asked Geithner when the Administration and the Treasury will provide a specific plan and timeline for mortgage and GSE reform.
Geithner said both the Treasury and the Administration are exploring a range of options and “we are hoping to be in a position relatively soon to engage with Congress more substantively to narrow the range of choices.” He added that bipartisan reform proposals on the House-side look “quite promising,” but added “we have a lot of work to do in this area.”
Rep. Barbara Lee (D-Calif.) asked Geithner for his thoughts on a moratorium on foreclosures and why Federal Housing Finance Agency (FHFA) Acting Director Edward DeMarco has refused to implement principle reductions.
Geithner said the FHFA “has been hesitant, so far, to provide principle reductions. He noted that the FHFA is cooperating with the Treasury and Geithner “hopes there will be more clarity on this in the coming weeks.”
Lee also told Geithner that she has legislation targeting CEO compensation that requires “that any CEO making 25-times more than the lowest wage worker … that they don’t get the tax deduction.” In other words, the legislation “would deny all firms tax deductions on any executive pay (including stock options) that runs over 25 times the pay of a firm’s lowest-paid employee.”
Geithner said “this is why it is important for Congress to take a look at the effective tax rates on the richest Americans.” In many parts of the economy, compensation “got a bit unmoored from gravity,” adding “it’s in the interest of the shareholders … that they restore some gravity to those levels,” he said.
NRA DEPOSIT RULE
Rep. Mario Diaz-Balart (R-Fla.) asked when the IRS’ proposed NRA deposit rule will be finalized. Geithner said he expects the IRS will “come out with it soon.” Geithner reassured Diaz-Balart that the U.S. will not share information with countries that have inadequate safeguards in place to protect the confidential exchange of information. Geithner also said he is “much less concerned” than Diaz-Balart that the rules will be damaging to banks and elsewhere.
Diaz-Balart also questioned Geithner on whether there was a cost-benefit analysis done on the proposed rule. Geithner said “we are very confident that we’ve designed this in a way that had very limited costs relative to the broader benefit.”
Diaz-Balart also asked to meet with Geithner before the rule is finalized “so we can work on it together.”
Emerson also said she appreciated efforts made by Treasury staff and EU officials in persuading the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to terminate services to Iranian banks. However, Emerson asked Geithner whether such termination could result in unintended consequences of generating more work for the Treasury’s Office of Terrorism and Financial Intelligence (TFI). Emerson said SWIFT’s decision could lead Iranian banks to work in the shadows, conducting the same types of transactions, thereby evading the TFI.
Geithner said he believed the budgetary resources allocated to TFI are “adequate” to meet the potential challenges.
CHINA’S U.S. DEBT HOLDINGS
Chairman of the full committee, Rep. Hal Rogers (R-Ky.), brought up China’s growing hold on U.S. debt and said he was concerned their holdings could have an influence on U.S. policy decisions. Geithner did not share Rogers’ view, and said the biggest risk to the U.S. “is not what other countries choose to do,” but Congress’ inability to come together to solve U.S. fiscal challenges.
Rogers asked whether the Treasury’s decision not to designate China as a currency manipulator is due to the fear that China will not extend further credit to the U.S. Geithner said that plays “no part in our judgment.” While noting that China does have “some ways to go” in appreciating its currency, Geithner said U.S. exports to China are growing rapidly and rising costs in China has led companies to shift manufacturing back to the U.S. Geithner called this development “very promising” and the Treasury and Administration want to continue to encourage that trend.
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