Transcript: Super Committee member Sen. Jon Kyl’s Q&A on previous debt proposals

Joint Select Committee on Deficit Reduction Hearing: Overview of Previous Debt Proposals on Nov. 1, 2011

Transcript of Sen. Jon Kyl’s (R-AZ) Question and Answer Session: 

Sen. Jon Kyl (R-AZ), member of the Joint Select Committee on Deficit Reduction. IMAGE SOURCE: DeficitReduction.gov

Sen. Jon Kyl (R-AZ):

“Thank you. First to Sen. Domenici and Sen. Simpson, it’s great to see you again, and to all four panelists, thank you for the thousands of hours that you’ve put in on these subjects. It’s been helpful to everyone.

“Sen. Simpson, you never disappoint. This is a serious subject but a little levity sometimes can help, and I appreciate that.

“You talked about eliminating so-called ‘tax expenditures.’ Now I have one quick question for you, a comment on taxes, and then I’d like to talk about entitlement reform.

“If you eliminated the so-called ‘tax expenditures’ – the biggest four of which on the personal side are deductions for medical expenses, charitable contributions, mortgage interest payments, and payments of state and local taxes – and you don’t reduce marginal tax rates commensurately, the roughly one-third of Americans who itemize would have higher effective tax burden, would they not? In other words, they would pay more in income taxes.”

 

Former Sen. Alan Simpson (R-WY): 

“We, in getting rid of the $1 trillion $100 billion, suggested that the $100 billion would go toward the deduction of the debt. The rest of it would come out and we would give the people of America what they have been asking for: broaden the base, lower the rates, get spending out of the code. We said we’ll give three rates: $0 to $70,000, you pay 8%; $70,000 to $210,000, you pay 14%; everything over $210,000, you pay 23%; and take the corporate rate to 26% from 36%.

“But if you want to put something back, go ahead. The issue being if you want it, pay for it. So then you could go to rates of 12% then 18% or whatever you want to do. We said on home mortgage interest deductions, give them a 12.5% non-refundable tax credit. That helps the little guy. If you want to do a charitable contribution, give them a 12.5% non-refundable tax credit. We realize those things. Municipal bonds? But at some point you just say, “Look, you were told to bring home the bacon. The lobbyists got you what you wanted. Now it’s over. The fun and games is over.”

 

Sen. Jon Kyl:

“So do I understand: of the $1.1 trillion, $1 trillion of that would go for rate reduction and only $100 billion for debt reduction?”

 

Sen. Alan Simpson: 

“That is correct, Jon, and it is good to see you. We served together, but let me just say that if you want to put something back, and they’re wonderful things – Earned Income Tax Credit. You can get the violin out if you want to talk about what you’re doing.”

 

Sen. Jon Kyl: 

“Well, why we not want to take the time to do that…

“Let me just make one observation and then I do want to get into entitlement spending. Both the Fiscal Commission and the Bipartisan Policy Center have suggested that one of the options here is to tax capital gains and dividends at ordinary income tax rates. Now, you started the testimony by noting that you wouldn’t want to do anything to would disrupt a fragile economic recovery. Sort of along the lines of first do no harm. My own observation is I think you could do great harm by effectively doubling the capital gains and dividend taxes, because those represent areas of capital formation and investment in our economy.

“Let me just make a quick observation here. The government receives capital gains revenues when taxpayers sell appreciated assets. The technical terms are called: realizations. Now Congress tried taxing capital gains at the same rate as ordinary income before – this was back in 1986 – and the resulting capital gains revenues were dismal. In fact, they shrunk and remained depressed for a decade until Congress lowered the capital gains rate in 1997.

“Higher capital gains taxes mean fewer realizations, a higher cost of capital, less activity in the capital markets, and less economic growth. The health care bill that was passed last year already increases capital gains and dividend rates by another 3.8%. That means that the very lowest capital gains rate under your suggestion would be 26.8% and the highest would be 32.8%. In other words, more than double the existing rate. Even the Joint Committee on Taxation would say that a rate that high will actually lose and not gain revenue and that doesn’t even account for the negative impact on economic growth. Other economists – one who testified before our Finance Committee – said letting the top capital gains and dividend rates drift up to 20% will erase the theoretical revenue gain from the increased tax rates and will lower both economic growth and wages. If the rate is pushed even higher, more revenue and GDP will be lost and wages will be even lower.

“So I would just ask you all, as we continue to visit about these things, to think about this. Your views are important to the committee, but in this one respect, I think it could be very counterproductive by lowering economic growth, not really raising any revenues, and it would make our deficit problems worse.

“Now, let me turn to entitlements here, because Dr. Rivlin I think you said something very important recently in response to Rep. [Jeb] Hensarling’s questions and I want to make sure I have this right. First of all, I think it’d be useful for you to explain the benefits of a defined support or a premium support such as you recommended, if you could do that generally. But also, correct me if I’m wrong, but I understood you to describe the plan laid out in your submitted testimony, which is a little different than the original Domenici-Rivlin, in that – at least there are two attributes: first of all, you would actually set the federal contribution level first by the second lowest bid, which would include fee-for-service, but have the fail-safe, as you described it, that would go up to GDP plus 1[%] with a sort of means-tested premium support in the event that it did so. If that’s not accurate, please tell me how I’m wrong.”

 

Dr. Alice Rivlin: 

“Senator, you have it exactly right. We have improved this plan, I think, over our original one. It is now more like the bipartisan plan in the Breaux-Thomas proposal of the late 1990s. One of the complaints that we got about the way we did it originally was it didn’t reflect the actual cost of health care. When you do it by a bidding process, then it does reflect the actual cost of health care.”

 

Sen. Jon Kyl: 

“As you’re describing the benefits talk about how you select the second lowest bid because I think that’s a very clever way to do this.”

 

Dr. Alice Rivlin:

“Well, that’s arguable. There are different ways of doing it, but we thought selecting the second lowest bid gave…It wasn’t the lowest which might well be flukishly low for some reason. But people who wanted to go to the even lower bid that wasn’t selected could do so and could get some money back.”

 

Sen. Jon Kyl: 

“They would pocket the difference between the second bid and the one that… If they wanted it to be the no dollar out-of-pocket, they would take the second lowest bid plans. Of course, anybody could offer plans at that level. If somebody offered a plan that was more expensive – perhaps it had different sets of benefits or whatever – then they could pay for it but the federal premiums support would only be at that second lowest bid.”

 

Dr. Alice Rivlin: 

“That’s right. So it gives you a way of making the competition real. We believe that would bring the costs down.”

 

Sen. Jon Kyl: 

“I agree with that. Now, let me go back to my first question there. Discuss the benefits of that premiums support concept generally, because I think it’s not necessarily well-understood. Then final question I’ll ask is that’s not all that you would recommend. You also recommend – and this really a question for all of you – additional changes to the existing system that we have in order to potentially reduce expenditures. Things like combining the Part A and Part B, increasing premiums under certain circumstances. I forgot whether you get into the co-pay issue or not. Could you also discuss whether some of those things are also useful to do even if we do the premium support but, in any event, certainly if we don’t do it?”

 

Dr. Alice Rivlin: 

“Yes, and I think also the things that Erskine Bowles mentioned – that the pilot programs; and attempts to find better ways of delivering care; and government support and private support for innovations and testing – those things and putting them out in a public domain. That is all a very good thing to do. We think it will pay off in the end. It’s not incompatible with our defined support plan, because once you have those innovations out there in the public domain, the private sector is going to pick them up, Medicare will use them, things will get better. ”

 

Sen. Jon Kyl: 

“Hopefully reduce costs.”

 

Sen. Pete Domenici (R-NM):

“Mr. Chairman and Madame Chairman, might I just follow up with Mr. Kyl with one observation on this one that you’re speaking of on Medicare. The first thing that we did was to note the objection to a new system, and it was generally right up front that you’re abolishing Medicare. So this new plan starts with the premise: we’ll have both programs and you can choose. That put us on a completely different path with our members than before. It is very different than anything you all have considered – excuse me, you all in the House have considered here – before when when you took this subject up.”

 

Erskine Bowles: 

“In our plan, we did try to address this issue. Our belief was the current benefit structure encourages overuse. There are currently a hodgepodge of different co-pays and deductible and premiums. We wanted more cost-sharing in our plan. We wanted people to have some skin in the game. We wanted to get rid of first dollar coverage for that reason. So we went to one deductible on Part A and Part B of $550. We had a 20% payment up to $5,500. Then a 5% co-pay up to $75,000 and capped out at that level. We also on Medigap – we had no Medigap would be available for the first $500 and the 50-50 up to $5,000.”

 

Sen. Jon Kyl:

“All of those, I think, are very useful suggestions. I appreciate them all. Thank you.”

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