Low taxes and open markets are keys to maintaining US competitiveness on the global stage, Treasury Secretary-nominee Henry Paulson told senators.
“If confirmed, I will focus intensely on how the United States can maintain and strengthen our competitive position,” Paulson told the Senate Finance Committee in prepared testimony at his confirmation hearing.
As expected, Paulson, the outgoing CEO of Goldman Sachs (GS) , offered no deviation from Bush administration policies on fiscal, foreign-exchange and trade matters.
Bush nominated Paulson earlier this month to replace outgoing Treasury Secretary John Snow.
Paulson, 60, is expected to win quick confirmation from both the committee and the full Senate, which could vote on the nomination before lawmakers are scheduled to leave June 30 for the weeklong Independence Day recess.
Paulson, in his opening statement, offered no specific policy prescriptions, but said low taxes and “collecting them in a simpler and fairer manner that does not distort economic decision making” would be crucial to a “stronger and more competitive” US economy. He also emphasized a need to address long-term unfunded obligations of the Social Security and Medicare programs, as well as enhancing the flexibility of capital and labor markets.
Under questioning by the panel, Paulson defended Bush’s call to extend the first-term tax cuts, arguing that any increase in the tax load could undermine economic growth.
Paulson said the federal deficit is too large, but argued that the gap remains manageable as long as the economy remains strong.
“Like all of us, I wish our deficit was lower,” Paulson told the panel.
But as a share of the economy, the deficit remains “in a realm of historical norm” and can be further reduced if the economy continues to expand, he said.
The Congressional Budget Office has forecast a fiscal 2006 deficit of around $300 billion, down from a previous estimate of $350 billion due to an increase in tax revenues amid a strong economy.
Paulson rejected suggestions by Sen. Olympia Snowe, R-ME, that the extension of all of Bush’s first-term tax cuts—a move projected to reduce revenues by around $2 trillion over a decade—would leave too large of a hole in the federal budget.
“I think it would be a big mistake to increase taxes. This economy is growing and jobs are being created,” Paulson said.
Paulson rejected notions that tax cuts pay for themselves, but argued that they were nonetheless essential to ensuring economic growth.
“As a general rule, I don’t believe that tax cuts pay for themselves,” Paulson said, echoing the opinion of most economists. Paulson said the 2001 tax cuts, however, were crucial to boosting the confidence of consumers, investors and top executives.
“We’ve clearly seen that tax cuts change behavior. There’s no doubt,” Paulson said.
Paulson was also grilled on China and its currency policies.
China has moved to loosen the longstanding peg between the yuan and the US dollar, but US policymakers and manufacturers contend the currency remains significantly undervalued at the expense of US exporters.
Paulson, who has dealt extensively with China at Goldman Sachs, echoed the administration in praising China for taking steps to loosen its currency peg, but insisted that Beijing has much more work to do.
China has made “significant changes” in its currency policy by accepting the principle of more flexible exchange rates, but must work to open its banking system to competition before the yuan becomes freely tradable, Paulson said.
“They’ve been moving in that direction…we need to encourage them to move quicker, because in my judgment they’re not going to be as successful as they’d like to be until they open that up to competition, and to foreign competition,” he said.
Paulson received praise from Democrats and Republicans on the committee.
“I’ve known Hank for 15 years. I recommend his nomination wholeheartedly and without reservation. He’s an extr