 in fundamentalist GI teachings. These are separately the same group of people we believe have held the seven hostages which go back almost well over a year now, including the Buckley, Janko, Weir, or others. The president's direction since the beginning has been to seek through diplomatic measures first to bring pressure to bear on the two groups that have custody of the American hostages. As you know, the captors have made as their demands the release by Israel of prisoners taken as they depart Southern Lebanon. President's position has been clear, and that is that we do not believe sensible to make concessions to hijackers on research today, Japan, and other countries. The state of play now is that we believe that Barry's motives in seizing general control of this were to further control political ambitions that is he could secure the release of Shia prisoners surely would help consolidate his own leadership in the country, which has been historically weak, particularly in Southern Lebanon, where most of those prisoners come from. At the same time, we believe that he has begun to get the message that his earlier expectations that we would lean on Israel to release those prisoners is not going to occur, and that over time, time and belief is not on his side, the pressure that will come on him from others and his own movement, as well as from other Lebanese, and we hope in Syria, lead them to release our own prisoners since that is the only way we can expect to get the full release of those held out in Israel. Israel has been consistent and just yesterday in a letter to the president has made clear its support for our policy, and it's wish to be helpful not only on this occasion by encountering terrorism more generally. President Assad in response to a letter from President Reagan has said that he will try to be helpful as an occasion for that. We understand that Barry is in the masques, and clearly the Syrian leadership has the influence to be able to persuade Barry to release those people that they want to. And I think that looking for that kind of pressure from Syria is reasonable on our part from the beginning two years ago, to apparent that Syria's support for not only the Shia, but for the Iranian Revolutionary Parts who have infiltrated Lebanon could not have been there, except with the suffering of Syria and with their support. The president is directly as well, and we examine and pursue every diplomatic avenue that holds some promise. The Secretary of State has been working around the clock and getting general very solid cooperation normally, as I said, from the Algerians. There have been offers as well from international organizations, the UN Secretary General, the Red Cross, and there's so much different context by those negotiators, but it's facilitating release if agreements are reached. In addition, however, the president believes that it's essential that there be some cost. And over time, there is an end to patience that is made emphatically clear and publicly that he doesn't envision an indiscriminate violent attack upon innocent people. And yet, there are measures that can be taken to affect the climate in which those hijackers live and their favorite generally. Among them are denied and still promising steps that might be taken hard to stop the flow of goods and services into Beirut and to other Lebanese ports. This could be done using naval forces and without the need for violence. There is as well value in emphasizing to the American people and to the global community that the airport there in Beirut has become a center of terrorism. Appartering terrorists, making possible hijackers, Secretary Schultz pointed out that his appearance Sunday in the past 15 years, 37 hijacking incidents haven't been involved with the Beirut International Airport. About 15% of the global hijackers have either originated there, ended there, or gone through there in the safe haven. And so, closing that airport, the reasonable thing to do the interest of the international community. One can consider a number of means for doing that, such as simply calling upon the international community to prohibit their own carriers from going into that airport. And contrary to popular opinion, there are quite a number of airlines that do. Many of them are locked and probably might not appear to a call. But many Western countries as well, European countries, other Arab countries, and particularly our call included, and for those who did not go along, that there might be the limitation of their service to this country, it could be a denied and yet effective way of bringing to a close the use of that airport. I stress again, the president has directed all of these diplomatic avenues be pursued vigorously first, but then we make ready further escalatory ladder designed to bring pressure to bear on the sheer leadership and those who can influence it. But our policy shall not change without making concessions to the hijackers for our busking others. I'm glad to take your questions. I thought we'll go over as I could respond. Go ahead. Just one question. Why would my concern is that their only way to safety is keeping the house here once they gave them up, even if they were really free prisoners, even if there's no linkage, that we might go in and go on off the face of the earth and it's not that I'm doing it for all of us but for some others. Is the administration's thinking and the master's too, is their only route the same way? We're allowing the first instance on there concluding that if their goal is to get those prisoners back it won't happen until they release the hostages. However, we believe that when we say applying pressure that isn't to say that it's an immediate threat of violence, the pressure is designed to influence the climate in which other Lebanese live, such as the Druze and the Sunni, who do have some influence on the Shia there in their route so that it becomes less comfortable for the entire community there. Their ability to translate pressure on the Shias, I think, in incentives go up. The question does arise as to what must be over time the viable strategy for deterring terrorism and helping with it when it occurs. I think every rational analyst in the administration recognizes that there must be a cost and that a sustained ability of this country in terms of political support and the means to deliver violent action to free it or to respond to terrorist measures is clear. In the short term, there is the risk that that threat, repeated constantly, provides an incentive for holding on to the hostages. And that's why this deliberation and means short of violence are those the president intends to exercise first. Subliminally, unfortunately, we can't successfully resolve these two conferences prior to the recession and we're going to call it a day when we're out on the stage of the two conferences. Mr. President, let me start on the supplemental because I think we're making good progress on that which is a focus where we can come pretty close to agreement. That is a 13 and a half billion dollar supplemental. Most of the money in it is for pretty routine things that we're all agreed on. About nine doses of replenishments like the CCC and the medical standards and so forth is about a billion and a half, so it pays up the amount for the routine. I think everybody's pretty well agreed there. There were a couple of items that could have been contentious but I think that we ought to be in a position where these could be solved. One is the water projects. We've had a fight for two and a half or three years on this, some in the Congress wanted to go with appropriations and new starts for an authorization bill. We have consistently said that we're willing to support the new start if we can get an authorization bill first in some form in terms of user fees and cost sharing. This is the argument that's gone on but I think in the last week we achieved the breakthrough which consists of two things. One, putting a fence around the appropriations in the supplemental that the money will be available only consistent with the reform measures that we would like to pass. And the second, we've worked out some principles in terms of pottery, on e-cords, new land navigation, and user fees for the Senate that become later in subsequent legislation. We've tried to talk to as many people in the House as possible about this and at least at the authorization committee level I think there's some pretty good sympathy for what we're trying to do. So what I would say is that we can solve this problem with supplemental to put the fancy language in it and we'll work out later. There is some important money in it as you know for foreign policy purposes, about $2 million for Israel and Egypt and both houses are agreed on that. There's $250 million for Jordan which is a late request that has been added in the Senate and we certainly hope that back into the south of the county. Both bills also finally contain funds, humanitarian assistance to Nicaragua. The numbers are slightly different, about 10 or 12 million apart. Some of the procedures and mechanisms are different but after a strong show on both sides we hope that this can be worked out well. So overall I think there's a good reason to believe that these small remaining differences on the supplemental can be worked out. We'd like to see it happen this week but it takes longer, it takes longer because it certainly, there isn't much cause where I'm much ready to delay. On the budget resolution I think the blunt fact is that we are stuck in mud and necessarily any adverse reflection on any of the parties to this dispute. I think it's fair to say that everyone's agreed that we can't tolerate these massive deficits that we have to have a dramatic scale back in the next budget year and beyond and I think both houses have indicated that we will have a well-meaning agreement with that principle by whacking out at least a quarter of a trillion dollars from the baseline budget over the next three years but the House and Senate budgets do that. The muddle unfortunately lies in the mix of those measures that we put together in order to bring that deficit down. And I would just like to report here very quickly that it's a matter of basic math. There's only five ways or five areas that we can go to to deal with the deficit this big now, 200 million dollars. They're obvious, defense number one, cost of living in Thailand is number two. Structural reform for some of the big domestic programs like veteran's health, general revenue sharing or Medicare number three, freezes on the routine operations of the federal government, smaller programs number four and revenues obviously number five. I'd just like to quickly indicate where we are and it's cognizant because we're not that we had to come together and I think that everybody will focus on some of the areas where we have a closer agreement should be possible to work out the big gaps that remain. On defense, I think it would be fair to say that the administration has made substantial concessions and compromises as this process has worked along until it's reached the constitutional stage. By supporting the Senate resolution, we can agree over the next three years relative to our January request for defense. We've got 125 billion budget authorities over the next three years and 84 billion dollars. So that's a substantial change. It's a substantial concession and we're getting pretty close to the bone and I hope everybody agrees with that. The difficulty is the House resolution would go beyond that with an additional 32 billion budget authority that's an 84 billion dollars, excuse me, 22 billion outlays, not where we've ended up in the Senate over the next three years already. I think the President's made it very clear on the budget authority, we have to go online. We need 033 in terms of real estate. We need 100, about 302 billion in terms of budget authority of 1986. We can't go below that. I think in the area of outlays, it's possible to go below where the Senate is. The spending is coming in slower than we expected. It's possible, I think, to talk about splitting the difference or making some concessions to the House on outlays, but we've made major concessions on defense. Really, we're not that far apart if we can get the House to focus on divinity in terms of budget authority. Major entitlements, cost of living in Titans, social security, retirement and so forth. The Senate has 34 billion in savings over three years, the House doesn't have any. We're pretty close to what might be called the political deadlock on that matter. I would just say to all of you here today from the budget point of view, there are $250 billion worth of cost of living pensions in the federal government, not to me, that's not the core cost of living pensions. It's a quarter of the entire budget. Can't do anything in that area. It's gonna be exempted with priority. It's pretty hard to see how we get this budget out of the control and get a meaningful depth of production. Further point is that there are no means tested programs in this category, not even with the core, and if necessary, offsets to be proposed for those with open poverty like as the Senate has interviewed. Third category, domestic structural reform, including things like agriculture and Medicare as I mentioned before. The House has about 45 billion in savings over three years. Senate has 75 billion over three years. So again, there's a gap of about 30 billion in terms of the savings that we need. Believe the House conferees have often come up by 10 billion in savings, or close one third of the gap. But I would have to say again that I don't know how you get there in terms of closing this deficit if we can't do any better than that. And again, this category doesn't include any means test programs. Fourth area is the routine operations of government. In some of the smaller grant programs, House has about 23 billion in savings over three years. Senate 34 billion, most of that difference is accounted for by some of the low income appropriated programs. I believe the Senate has indicated a willingness to compromise the good way for the House in this area. And I would hope at least that would be only a minor area of difference as we try to work this through. Finally, the fifth area is obviously revenues. And I think the President's made it very clear that we have to start on the spending side and revenues are a last resort after the budget has been caught to the minimum essential level of government that we need. It's pretty obvious that we haven't reached that point yet. And I think the fact that neither the House or the Senate resolutions containing new revenues is pretty good agreement for the moment anyway. So I would say summary then, take these five areas of the budget and look at our arguments and disagreements over the next, that we only have moderate differences left in category one defense. It seems to me the regional manager there will solve this. We have major differences left in category two, the cost of living in Titans, category three, the domestic structure reforms. I think that somehow we've got to get this solved and deficit will continue to grow and weaken the economy sooner or later the solution will be beyond anything any of us can reach. That's kind of the static, important, quick outline of where the differences are. I know these things are very tough, literally, but we can't get it done this week. I certainly hope that everybody will keep working at it because we've got to have a budget and we've got to have a big reduction in the reduction. Okay. Well, I might just mention that there's a difference between the House and the Senate on that, but I think everybody has been around this track long enough to know that if you put something on paper, it doesn't mean you save any money unless you implement it and enforce it. And I believe that if you're going to face all the political pressure that comes from coming to cut some of these programs, then it's important to actually deliver the savings within the force of mechanism. And therefore a strong reconciliation is needed. And obviously there's more of that than the Senate approach and the House. That's another thing that has to be worked on. All right, thanks, Dave. I'm getting around the country as much as I have, but I believe the people of this country are counting on us to cut spending and to reduce the deficit. We've all made concessions during this budget process as Dave said. You know, the other day I was interested in reading something that was spoken in 1976 when Senator Hugh Scott was delivering his farewell to the Congress, leading government. And the bulk of his speech had to do things that he had once believed, but had come to understand or at least in his view, well, he disagreed with his previous beliefs and he concluded his speech with this line. Beware of governments that soar into the infinite and dive into the unfathomable, but never pay cash. I hope that the House and the Senate can resolve the differences as soon as possible. I want to thank Ben and Master Kosti, Bob Packwood for their commitment to pass the tax reform legislation this year. It's going to take a lot of work by all of us, but we should work together to get it passed and get it passed this year. And I'd like to call on Jim Baker for some comments and then ask you to take your questions. Thank you very much, President. It was one month ago this week that you launched the tax reform and I'd have to say that we're very pleased with the response so far and particularly with the bipartisan nature response. As you said, when you launched the proposal, the tax reform is not something that's gonna pass unless there is bipartisan support. Obviously we were encouraged by the response to the chairman of the House Ways and Means Committee speech following your speech. We were likewise encouraged by Senator Packwood's commitment to expedite the process. Further encouraged when the speaker testified before the Ways and Means Committee in effect said that he would hope that the House could act so that the Senate would have a bill by Thanksgiving and we hope that he still feels that way. The best way I think was present to beat tax reform is to delay it. And for this reason, we're extremely pleased that the leadership has committed to move tax reform and to move it this year. I guess the only other point I would make since the process is just beginning is that we've been at it long enough to the point I think we could say that the bottom line is that we've got here something that's never been accomplished before in this country and that's an overall complete overhaul of the taxes. We got a 461 page proposal and yes, there have been some shots taken at it and yes, there are areas in which people have differences and criticisms and disagreements but basically the overall structure of the proposal we think when you consider what we're undertaking is standing up pretty darn well through the legislative process so far. We're in the fourth week of hearings in the House and we're in the third week of hearings before the Senate Finance Committee. So we think so far there's really been no compelling criticism of the overall structure of the tax proposal. That's not to say that there won't be changes as we move along the line. That's where I think we are. I'd be delighted to try and answer your questions. Yes, sir, Bill? Chairman, as chairman of the House of Representatives, I am concerned about the testimony that you gave of the four chairman of the House of Representatives about the loss of revenues over a seven year period. I believe you testified that the loss of the revenue of 12 billion dollars. Has there been any rethinking, particularly since I see in the news paper there was some possibilities of rethinking of the perpetrators about the tax bill in the form of taxes because I certainly am the strong support of tax reform during the impeachment of the House of Representatives. You've got to be concerned about the tax reform tax in every way to increase the taxes that we're already facing. Bill, as far as the rethinking article that you're referring to, we are in the process now. As matters come up before the committees, we take each of those criticisms and we analyze them where we think there might be some merit. Quite frankly, we think that there may well be some merit with respect to the criticism that some two earner families in the middle income group are going to be adversely affected as a result of our changing the child care credit to a child care deduction. The way that interrelates with the new rate structure is liable to adversely impact. We think it might adversely impact some middle income families and so we're studying that and we may have some suggestions to offer to the chairman of Ways and Means and the chairman of the Senate Finance Committee if we conclude that that is in fact the case. We don't think that the problem right now, we don't think that problem goes beyond that. The numbers that we have submitted that we submitted during my testimony that the President made public when he announced the proposal to the effect generally that people in the under $20,000 class get an 18.3% tax reduction. Those numbers are valid. People between 20 and 50,000 get a 7.2% tax reduction. Those numbers are valid. People over 50 get a 5.8% tax reduction. Those numbers are valid. There will be some 200 families in that middle income group who might be adversely affected. Now with respect to your question about revenue neutrality, what I have said is that we would anticipate that the proposal would lose $11 billion over a five year period. We gain 1.2 billion, we think in the first year. We lose about 1.2 billion in the last year and it moves around in between them. We say that's revenue neutral built because you have to compare that against proceeds during that five year period of $4.7 trillion. So you're within 0.24% of revenue neutrality and that's about as close as you can get on estimate. So you say up to 1% would be revenue neutral? That's the standard that's generally been used as I understand it at Treasury. Bob, 1% either way is revenue neutrality just because you can't get much closer to that on estimate basis. Our committee is still scrubbing those numbers and I'm hoping if we come up with any more losses that there will be a cooperative effort on the part of the Treasury. You've testified before that before my committee and I just hope that's- Compatanship will continue to make- The President said as long ago as the State of the Union that he wants tax reform to be revenue neutral. He doesn't want it to be a tax increase in disguise but he doesn't want it to exacerbate the deficit. Thanks Jim. Say one thing. I know that you are all leaving this weekend for a brief moment of July holiday. I'll be left rather than around here in public housing. Myself, I've been changing my vacations for a few reasons. I just want you to know that if you'd like to leave things in my hands of these problems, I'd be very happy to come to a solution and reach you with it in my bag as a federal company. So I thank you all for coming here today. I'm here before you or anyone else otherwise. I guess we're- We just say thank you Mr. President for inviting us. Go ahead.