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Remarks by Senator Toomey on Tax Reform and the Super Committee

Location: Washington, DC

U.S. Senator Pat Toomey (R-Pa.) spoke today at the Brookings Institution, setting the record straight on recent mischaracterizations of the super committee's negotiations and his deficit reduction framework.

During his remarks, Sen. Toomey also outlined how pro-growth tax reform presents a path forward to address our fiscal challenges, including the impending fiscal cliff.

A full transcript of the senator's speech is below.

"Thank you very much, Ron. First of all, thank you for that kind introduction and thank you for inviting me to be with you today, and to share some thoughts with everybody on our budget circumstances, what really happened at the Joint Select Committee, the fiscal cliff, and most importantly, I think, where we go from here.

"By the way, it's especially kind of you to invite me given my very well-documented weakness in public speaking. My staff is forever reminding me, they like to say, 'Pat, remember, just because you can't give a good speech, doesn't mean you can't give a short speech.' So I will try to keep their advice in mind and keep it relatively brief.

"But the real reasons that I really do appreciate the chance to be here at Brookings is, well, several. First of all, this organization does some very good work. Much of it I won't always agree on, but I have always respected, as I think people who observe Brookings have respected, the intellectual integrity, the thoughtful analysis, and the honest debate that you folks participate in and contribute to.

"Second factor that I appreciate is the fact that you chose to invite me to be here, despite the fact that we do come from a different place philosophically, ideologically, and so naturally we will often come to different conclusions. But you're still willing to have that discussion, I appreciate that.

"And I think you probably share with me the view that if we're ever going to solve these really, really tough challenges that we face as a nation, we need to have an honest debate. We need to be willing to look at and accept the facts of history, of arithmetic, of actuarial tables. We need to accept those facts as they are, and deal with them.

"And if we're going to find common ground, rather than just have another fight, then the truth has to count for something.

"So the first point I want to talk about is the truth. The truth is that our big entitlement programs, Social Security included, but especially the mandatory health care programs, are unsustainable. I think we all know that. They're driving the medium- and long-term fiscal disaster that's accelerating toward us.

"And it's not just me who says this; President Obama himself has acknowledged this. In a press conference last year, President Obama said, and I quote, 'If you look at the numbers, Medicare in particular will run out of money, and we will not be able to sustain that program, no matter how much taxes go up.'

"He went on to say, 'I mean, it's not an option for us to just sit by and do nothing. And if you're a progressive who cares about the integrity of Social Security and Medicare and Medicaid, and believes that it is part of what makes our country great and that we look after our seniors, and we look after our most vulnerable, then we have an obligation to make sure that we make those changes that are required to make it sustainable over the long term.'

"President Obama said that just a year ago. President Obama was right. He identified the real problem.

"In fact, if you think about it, no significant government program can grow faster than our economy indefinitely. It'll consume everything. That's just arithmetic. That's inevitable. Fact is, however, all three of our big entitlement programs are growing faster than the economy, some much faster.

"Take a look at CBO's March baseline. In nominal terms, they're projecting an average 10-year growth rate of 5 percent. In the short run, that's probably pretty optimistic, but that's what they're projecting. Social Security they're projecting to grow at 5.7 percent, Medicare at 6.4 percent, and Medicaid and other mandatory programs, 11.1 percent.

"Think about that. Medicaid and the other mandatory health programs are growing at more than twice the rate that we can reasonably hope our economy is going to grow at. This, ladies and gentlemen, I would suggest is pretty close to the definition of unsustainable.

"And these programs are not trivial programs, as we know. These are already huge. This year, 2012, Social Security, Medicare and Medicaid, and other mandatory health programs already constitute 42 percent of federal spending. By 2022, these programs alone, together with interest on our debt, are projected to consume about 90 percent of the portion of GDP that we have historically collected in taxes.

"So I mention this, and I'm stressing this, because these are the most salient facts that informed the judgment of the six Republicans on the supercommittee. This is what we focused on. And we wanted to solve the big problem. And this was it. What we wanted to do specifically was to make the structural reforms - change the architecture of at least one of the big entitlement programs so that we could put it on a sustainable path, and in the process, begin to put our federal budget on a sustainable path.

"And so we developed an initial framework that we discussed with our colleagues on the committee. And the initial framework included new revenue. What we said, first of all, and let me be very clear, I don't believe that adding new revenue in the form of an increase in the total tax burden is either necessary or optimal or economically or fiscally required to solve this problem, because I think it's a problem that arises on the spending side.

"And, as you know, it's anathema to us to propose an increase in revenue. But we did recognize that it was politically necessary because it was absolutely essential for our friends on the other side. And so we were willing to do that provided that we would get the architectural entitlement reform that we know we need.

"This is something - this is an essential - essentially consistent with the framework that Bowles-Simpson has proposed, again, President Obama acknowledged that you can't do this with taxes alone - you have to have reform to the entitlement programs - I think any objective observer has to come to the conclusion that if we're going to fix this problem, we have to do it with the entitlement programs. And in our view, whatever revenue we would agree to put on the table would be commensurate to the scope and the nature of the reform of the entitlement programs.

"The Democratic offer that we got was a trillion dollars in tax increases, a trillion dollars in mostly unspecified spending cuts, although there were some specifics, but absolutely no architectural reform of the entitlement programs. In other words, they wanted a huge tax increase, but they were not willing to begin to solve the real problem.

"The actual specific one-page summary that they circulated is here - I know it's small print, probably hard to read - but if you look on the spending side, and if you look specifically on Medicare and Medicaid, most of the spending reductions were to providers, ratcheting down reimbursements to health care providers is something we've been doing, and that is not anything that's going to put this program on a sustainable path. There's nothing that remotely resembles structural reform, something that would change the architecture, change the incentives.

"On the revenue side, as you can see, the total revenue is a trillion dollars. They wanted to maintain current progressivity, which is no surprise. They wanted to keep the top rate no higher than 35 percent - to their credit, I think - and proposed generating a lot of the revenue by limiting the value of deductions.

"But at the end of the day, it was a trillion-dollar tax increase without solving the problem, without even taking a big step in the direction of solving the problem. And as such, this was not going to work for the Republicans on the committee. And so we remained deadlocked - we were deadlocked for many weeks - without any real progress.

"So I started to think about, is there another way we can approach this problem. Is there another way we could establish maybe a different framework, a different paradigm that might allow us to find some common ground?

"I came up with a proposal when I decided that we were hopelessly deadlocked on the previous framework and decided that we would have to give up on the idea of getting the structural change to the entitlement programs that we needed. That, I thought, was a very big concession, because I thought that's what we were there to accomplish. But I wanted to accomplish these objectives as well. And so, at that moment I was willing to give up on that structural reform.

"Here's what the proposal was meant to achieve: reach the $1.2 trillion in deficit reduction, avoid the sequestration, achieve the legislative goal, have at least meaningful entitlement curbs in spending, at least bend the growth curves a little bit in the out years - if we can't have the structural reform we've got to at least make a difference, chain CPI was something that I stipulated had to be part of this agreement. I want to say a little bit more about that in a moment.

"Very important to me was avoiding this massive tax increase that's coming, and that was part of this arrangement. I've quantified it here as an $800 billion-plus tax hike - of course, that really describes only the effect on the top two brackets. The latest proposal from my friends on the other side suggests that we might be in for a much, much bigger tax increase even than that. I suggested that we have revenue and spending cuts that would occur in a similar ratio to that which was proposed by the Bowles-Simpson commission.

"And, as a fundamental aspect of my proposal, any new revenue had to come in the context of pro-growth individual tax reform, which is also completely consistent with what every bipartisan commission has recommended.

"Let me get into the specifics, the dollar figures. We were proposing $750 billion in spending cuts, $500 billion in revenue, interest savings that would be $200 billion approximately over the course of 10 years, total deficit reduction of $1.5 trillion.

"Again let me just - $500 billion of new revenue. We were meeting them at the halfway point. They had asked for a trillion, we put $500 billion on the table. If you look at how this breaks down in the ratio of spending versus tax revenue, just the tax portion - and I will, in a moment, drill down into the details of the revenue number - but the total revenue was about a 3-to-1 ratio. If you look at spending against all revenue, it's 1.5-to-1 against a Bowles-Simpson ratio of 3-to-1.

"What would the spending consist of? As I mentioned, at this point in the process I had given up on the idea of having structural reform, and thought we needed a different approach. The good news is, by then there had already been so much work done by others, the ground had been pretty well plowed in terms of spending reductions that weren't even terribly controversial.

"We were zeroing in for the purpose of this proposal on items that had been at least tentatively agreed to by some kind of bipartisan group in the recent past: either the Joint Select Committee itself, where we had had numerous presentations on all kinds of opportunities to reduce spending. The Biden talks, which had happened the previous year, the president's budget - in some cases, we lifted things right out of the president's budget proposal - the Rivlin-Domenici plan, and Bowles-Simpson itself.

"The idea is, on the spending side at this point, I was suggesting that we go after the lowest-hanging fruit.

"In Medicare, it was about $225 billion, much of that, frankly, would have come from means testing of more affluent Medicare beneficiaries, Medicaid, and other health, we had the same $50 billion estimate that our Democratic friends had proposed. Other mandatory was $100 billion.

"Chain CPI was $165 billion on the spending side, and then discretionary spending of $150 billion, for a total of the $750 billion that I mentioned. Now let me just digress for one moment on chain CPI, because it occurred to me then, and I still believe now, that in some ways chain CPI is like the perfect metaphor, or maybe a microcosm, of exactly what we need to be willing to do if we're going to address this problem.

"So first of all, as everyone in this room probably understands, chain CPI is a measure of inflation that takes into account consumer substitution behavior, so it is almost universally acknowledged as a more accurate way to measure real inflation as it occurs to real consumers.

"Switching from the current measure of CPI to chain CPI, chain CPI tends to, of course, to estimate CPI at a slightly lower rate. Switching doesn't cut anybody's benefits, but it does curb the rate at which future benefits grow. It also generates additional revenue, tax revenue, because it is the measure that is used to establish the thresholds for the various income brackets, and if you move those brackets up more slowly, as wages rise faster than the increase in the brackets, people are paying more in tax revenue over time.

"It was recommended, it was a reform recommended by Bowles-Simpson. It was recommended by Rivlin-Domenici, it happens to have a ratio of savings to new revenue of about 1.5-to-1. It's politically painful for everyone, because everyone in office has constituents who would see a slightly slower rate of growth in their benefits. Everyone has constituents who pay taxes.

"At the end of the day, the fact is Republicans were for it, and the Democrats absolutely refused.

"On the revenue side, this first item was the most controversial and the toughest one, but I want to be very clear about this, I was not asking my Democratic colleagues to accept something that I believe, which was that if you have pro-growth tax reform, you'll have stronger economic growth - a bigger GDP number means more revenue, as a positive dynamic matter of fact.

"I believe that. There was a lot of skepticism on the other side, so I didn't ask them to accept it. What we said we would do was put $250 billion of statically-scored additional revenue on the table, as scored by the Joint Tax Committee.

"The chain CPI that I described a moment ago, as I said, that generates additional revenue. We were advocating that we put some non-tax revenue, specifically asset sales and some user fees. Our proposal included a revenue-neutral piece, so there's no dollar figure, but I thought, many of us thought that it would be very constructive, actually put a lot of into this. I really want to compliment (Sen.) Rob Portman who really spearheaded this, but there was strong bipartisan consensus that we need corporate tax reform. The supercommittee had unlimited jurisdiction, we could have done that.

"And I thought we should have, and drop that right into this package, so that we'd have a broadening of the base, a simplification of the system and a lowering of marginal rates so that we, our workers and our businesses would be more competitive. That was part of it. Again, Rob did a lot of the heavy lifting on getting the specifics of that.

"We advocated that we maintain current policy on capital gains dividends and the estate tax and make them permanent. That's the total of $500 billion. I want to drill down just for a minute on the static tax revenue piece on this because that was, you know, that was frankly the hardest part for us to offer and the source of the pro-growth tax reform.

"So the first piece was that we established a goal of lowering all marginal rates by 20 percent. I say that was a goal because we had several simultaneous goals, and this one was subordinate to the others, and I will specify what I mean by that.

"First of all, we'd have to generate the revenue that would not only offset the lost revenue from lowering marginal rates but generate the $250 billion in statically-scored revenue. And we would do that in several ways, one would be by placing a hard dollar cap on itemized deductions. We'd maintain the standard deduction where it is, and we'd put a limit on the total amount of itemized deductions. We would suggest replacing the income exclusion on state and local bonds with a direct interest subsidy to the issuers rather than the interest exclusion to the investors.

"We'd repeal various miscellaneous business and personal credits, not the earned income tax credit, not those that are focused mostly on the lower income brackets, but more on the higher ones and include as a taxable income, a portion of the health insurance exclusion. But let me stress that none of us, and certainly I, was not religious about exactly what mechanism would occur.

"These were the ideas that we knew in combination would allow us to lower the marginal rates, generate the income we said we would generate, and so these were some of the ideas that we were choosing from. Virtually every one of them is very dialable. You can adjust the amount of revenue or savings, depending on how you specify the levels.

"But this is the most important thing, we stipulated right at the very beginning that in this arrangement, all the net new revenue would have to come from the top two brackets, and I will be very candid with you: This is why it is very objectionable to me when people who know better suggest that I was advocating that we have some kind of tax increase on the middle class to pay for a tax cut for the rich.

"The proposal specifically stated that we would generate increased revenue from the top two brackets exclusively, and we would adjust every dial needed to ensure that the lower brackets did not have an increase in the tax burden. And in the process, of course, the tax load becomes more progressive, not less progressive.

"So let me just summarize the proposal that I actually put on the table and consider the concessions that we were offering to our colleagues.

"First of all, on the spending side, the spending-to-revenue ratio was more favorable to the Democratic point of view than any bipartisan commission. The specific spending items were the least controversial ones.

"We had abandoned the idea of the architectural or structural reforms and were looking for only those that had previously demonstrated bipartisan support. We offered real, statically-scored tax revenue. As Ron pointed out, Sen. Durbin described it as a breakthrough.

"We met the Democrats halfway on their proposal. We insisted on pro-growth tax reform as the mechanism by which we would generate that revenue so that we wouldn't be damaging the economy while we were doing this, and this is exactly the mechanism that every bipartisan commission has proposed.

"We proposed making the tax code more progressive by stipulating, as I said, that the extra revenue would come from the top brackets, not the others. We would have achieved our statutory goal of deficit reduction. We would have avoided the sequestration and, maybe most importantly, we would have demonstrated to the American people that we were capable of governing. Unfortunately, my colleagues on the other side walked away from the table.

"So where are we now? Well, we're in a tough spot right now. Some of my Democratic colleagues are now doubling down on the tax hike message, actually that's not true, they're quintupling down.

"Sen. Murray's call that all tax rates go up - it's a staggering increase, and what she said, I think probably from this very stage or thereabouts, and I quote it's Sen. Murray, she says, 'If we can't get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013 rather than lock in a long-term deal that throws middle-class families under the bus.'

"I was on Squawk Box yesterday morning with Howard Dean, and he was a little bit more direct. He said, and I quote, 'I think we ought to do it, let's just go over the fiscal cliff.' Gov. Dean goes on to say, 'Maybe 700,000 people would lose their jobs.'

"That's stunning to me. It's disturbing that these very prominent folks, knowing that this multi-trillion dollar tax increase would very likely cause a recession, especially when you consider how fragile the economy is right now. That knowing that it would put hundreds of thousands more Americans out of work, they want to do it anyway. You have to ask yourself 'Why?'

"Well, I know Sen. Murray's theory is that after all the rates go up, after a little while, we'll come back and lower the lower bracket rates back to where they are today. Frankly, I think there's a certain level of cynicism in thinking that that kind of deception is appropriate or that it fools anybody. But, more importantly, no one knows how that's going to turn out. No one knows, after those rates go up and this damage is done, how much damage or whether it can be reversed. But, the other consideration is that if Sen. Murray got her way and we had this massive tax increase on every taxpaying American, and then we lower the rates so that the net tax increase remains in place for just the top two brackets, what do they get out of that? I would argue you still get a recession.

"My own view is that it's the impact of those top two brackets that have the strongest influence on economic growth, and then on the revenue side, Joint Tax will estimate that you get about $800 billion over 10 years. $800 billion is about 8 percent of the projected deficit over the next 10 years.

"So she's suggesting that we risk plunging this country into a very serious recession for who knows how long, who knows how many hundreds of thousands or maybe millions of Americans out of work for an 8 percent solution? This looks to me like this is not actually a substantive solution. It looks more like a political and ideological idea. And since it certainly doesn't solve the problem, would the middle class be reasonable to worry that, after this tax increase, they're up next?

"See, I think there's a better way than going over the fiscal cliff, as some of my colleagues have unfortunately recommended. I think what we ought to do is extend all the current tax rates for at least one more year. These rates have been in place for 12 years now. There was a two-year extension, as we all know, that was supported with bipartisan majorities and signed into law by President Obama a year and a half ago. I think actually this is the approach that might have the best chance of succeeding.

"And then we use that time this next year to do what we really need to do on the tax side, which is fundamental pro-growth tax reform so that we have the growth that we badly need. I think there's really very little dispute that if we do that tax reform right, it generates very strong economic growth and the job creation that goes with it. But we also - it's at least equally important - that we do the entitlement reform that is driving this whole fiscal problem in the first place.

"And let me just be clear: I know I'm not going to get my way on everything. The entitlement reform that we do isn't going to look exactly the way I would write the plan. But we do have to agree on the fundamental problem, we do have to face the facts that these programs need to be reformed.

"And just as I demonstrated on the supercommittee, and many other times in the year and a half I've been in the Senate, I'm willing to work with people on the other side for this very, very important goal.

"And just think of the upside if we get this right: if we put our biggest entitlement programs on a sustainable path, not only do we ensure their survival, but that's by far the most important thing to avoid this fiscal crisis that we are courting so irresponsibly in my view.

"If we also enacted pro-growth tax reform - that everybody knows we need - I think we would kick off a surge of investment and economic growth and job creation and corresponding consumption. I think we would see the recovery that we've been waiting for if we did those two things.

"So I think a strong recovery is well within reach. But it's up to us.

"If we can finally get it right here in Washington with the right kinds of policies that demonstrate we have the political will to put our country on a sustainable fiscal path and we've got the ability to create a pro-growth tax and investment environment, I am convinced the 21st century can be another great American century.

"Thanks very much for listening."

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