Toomey: "We are on a completely unsustainable path"

WASHINGTON -- U.S. Sen. Pat Toomey, R-Pa., blames the failure of the Super Committee on three things: Democrats, Democrats and -- wait, what was that third thing? -- Ah, right: Democrats.

There were the Democrats who authorized the execessive spending that created the federal deficit, the Democrats who rebuked his efforts to institute Medicaid premiums and the Democrats who are trying to ensure President Obama can run on a campaign platform that pits him against what he seems to characterize as a do-nothing Congress.

That was the gist of Mr. Toomey's remarks today in a 15-minute speech at The Heritage Foundation, a conservative Washington think tank.

Read for yourself here:

Let’s remember, this didn't happen overnight. What happened that brought about the massive budget deficits and mounting debt that caused this committee to come into being was of course, fundamentally a spending spree. That's what really has driven this. Remember, it's been the sequence of stimulus bills and bailouts and government takeovers, a huge surge in discretionary spending, and I think of it sometimes as the political resurrection of John Maynard Keynes – my God, the man’s dead, can’t he just rest in peace? But in his name and invoking his memory, this government has gone on just an unprecedented spending spree in the misguided notion that somehow we can borrow and spend our way back to prosperity. So by any measure, the spending has gone through the roof.

One of the measures that I think is particularly telling is in 2007 total spending by the federal government as a percentage of our economy was about 19.7 percent. By 2009, it was 24.7 percent – fully a 25 percent increase in the size of the federal government as a percentage of our economy in a mere two years. I think that says it all. But let me say one more thing and that is what we have, what we are facing is not fundamentally a tax problem. As recently as 2007, the very tax rates that we have today, this code, generated revenue that was about the historical average in recent decades, about 18.5 percent of GDP, and with revenue at 18.5 percent of GDP, in 2007, we had a deficit that was almost trivial in size. It was 1.2 percent of GDP, a size that seems quaint by contemporary standards, right? An eminently manageable number, and this is not ancient history, and this is with the current tax rates.

Another illustration of the fact that taxes are not the problem that got us here is consider this, if you could double all of the individual tax revenue that was collected last year – not that you could without cratering the economy – but imagine that you could, if you did that, you still would have run a $400 billion deficit last year. In fact, CBO ran through the exercise of calculating where tax rates would have to be if we were going to solve the entire long-term deficit and debt problem through taxes alone, and you know what they came up with? They said that the top individual and corporate tax rates would be 88 percent. And all the other rates would have to increase in proportion. Clearly no economy could possibly sustain those kinds of rates. So it's actually arithmetically impossible to solve this problem on the tax side alone.

So now, we find ourselves having gone through this spending spree, find ourselves with a weak economy still. It has not had the intended effect. Unemployment still is persistently way, way, too high. But of course, now, we have now a huge debt – about 70 percent of GDP now and growing rapidly. If you want to consider how unsustainable, how utterly unsustainable the situation is, I think here's the statistic that speaks volumes. If you look at just Social Security and the mandatory health care programs and interest on our debt, just those three things, those three things alone by 2021 – inside the current budget window – are projected to consume 90 percent of all expected tax revenue. Just those three things. Leaving absolutely nothing for all the other mandatory spending programs, all the welfare programs, nothing whatsoever for discretionary, defense spending, none of that is included in those three things, but yet they would consume 90 percent of what we could reasonably expect to collect in revenue.

So it's abundantly obvious to me and probably to all of you we are on a completely unsustainable path. And so at the super committee, the Republicans – I have to say I'm very pleased at the extent to which we were relatively united, not completely unanimous in everything, certainly there were disagreements, but mostly it was an emphasis and priorities. What we did want to do is fix the problem. And what was the problem? President Obama was helpful in defining the problem quite correctly, and I will quote. He said ‘the major driver of our long-term liabilities, everybody here knows, is Medicare and Medicaid and our health care spending, nothing comes close.’ That's from president Obama in January of 2010. He's absolutely right.

And so what we set out to do was to redesign what I think are fundamentally flawed architectures of these big programs which are the reason that they are unsustainable, and redesign them in a way that would make them work, make them sustainable, allow us to get back on a sustainable fiscal path. The House Republican budget gave us a way to go forward. We never expected that the Democrats would warmly embrace that. We weren't shocked when they didn't, but we were opened to any number of other ways to try to change the problem with the architecture of these big programs. Failing a change in the architecture, we suggested can we at least make some meaningful reforms in things like eligibility and means testing so that we could make meaningful curbs to the long-term growth trajectory of these programs? That was what we set out to try to accomplish.

The Democrats had a different idea. They wanted a $1 trillion tax increase. They wanted that at the beginning. They wanted that in the middle. They wanted that at the end. Sometimes a little more than $1 trillion. But the gist of it was a massive tax increase with no changes whatsoever to the fundamental design of the programs that are driving the problem.

I have maintained from the beginning, a $1 trillion tax increase is a complete nonstarter; it would be devastating to the economy, doesn't solve the problem; it’s the wrong way to go. But we were at this impasse and we were at that impasse for a period of months. And I was wrestling with this question, is there a way that we could put some kind of revenue on the table since the Democrats are so insistent on this that might be able to allow us to break this logjam? Is there way we could do it that would be consistent with our principals, consistent with the very important priority of having pro-growth economic policy?

And there were two facts that I thought we ought to take advantage of in a way. One is the fact we are currently facing the biggest tax increase in American history. We are about 13 months away from massive tax increases across the board, and as much as I hope we'll be able to prevent that, it's not obvious to me that we will have the political ability to prevent those from occurring. So that is reality number one. We are facing a grave threat to our economy and to taxpayers.

Secondly, currently we continue to be hobbled by what we all know is an absurdly ridiculous tax code – one that's terribly unfair and incredibly complicated, difficult to comply with, misallocates resources. So it struck me that maybe it would be worth something if we could avoid the biggest tax increase in American history and at the same time do it in a way that would generate pro-growth tax reform. And that's how I developed this framework that we proposed to our Democratic colleagues.

It had a tax component and a spending component. On the tax side the idea was how could we maximize economic growth? And since I believe very strongly that capital formation is one of the biggest drivers of economic growth, we said let's make sure we preserve the things that allow for capital formation. So let's insist as one of the features of this proposal that the capital gains, dividend rates, and estate tax rates that are currently in force become permanent. Secondly, let's insist that we have a revenue neutral corporate tax reform that would lower the top rate to 25 percent, broaden the base on which taxes are applied, and develop a territorial system so that we could encourage, among other things, huge repatriation of hundreds of billions of dollars that are overseas. There's been significant bipartisan acknowledgement we need to do this kind of corporate tax reform. Rob Portman, to his credit, was a very, very passionate advocate for this. Many of us on the committee spent a great deal of time working on the specifics of what this would look like. I thought this is something we could and we really should do within this committee.

Thirdly, on the individual income tax side, what I suggested is that we lower marginal rates. Let's shoot for 20 percent. A 20 percent reduction across the board in all marginal income tax rates, and then offset the lost revenue by limiting the value of deductions. And I think we could and should be flexible about the exact mechanics by which we achieve that. I personally think the mechanism that Marty Feldstein developed whereby you limit the value of deductions to a percentage of adjusted gross income is a very appealing way, but there are other ways. But in any case, our proposal was that we do it in a way that does not make the tax code less progressive than it is today, that we maintain existing progressivity with one very important exception, and that is, that we would further restrict the value of deductions for the top two brackets such that we would generate a net $250 billion over 10 years for deficit reduction.

In addition to the $250 billion so generated, we proposed that we have another $250 billion of revenue that would come from relatively noncontroversial sources, things like user fees, asset sales, the feedback that comes from higher compliance with a simpler tax code, for instance. The total revenue piece in our proposal was $500 billion. We then complemented that with a suggestion that we have $750 billion in spending reduction. And we had long since given up on the idea we were going to block grant Medicaid to the states for instance, or that we were going to adopt a premium support model for Medicare, as much as I think those policies are what we need to do. At this point we were looking for what's possible in the final couple of weeks before the clock ran out on the super committee.

And so we suggested that these spending reductions be comprised of items that had already been vetted by both sides and had at least been tentatively to some degree deemed acceptable to both sides, at least in the context of a broader agreement. The combination is $1.25 trillion when you add in the savings of the results from lower interest payments on less borrowings. You end up just under $1.5 trillion. So what we offered, I think was a very reasonable offer. We offered to generate revenue as the Democrats insisted they wanted. We suggested that we do it through the very mechanism that every bipartisan group that has looked at this suggested, which is tax reform that broadens the base and lower the rates. We suggested that we do it in a fashion that would make the tax code even more progressive, which is something the other side insisted that they have. We offered a combination in which the spending reduction to revenue ratio was more favorable to the Democrats that any of the bipartisan commissions had suggested. And we offered a plan that would have allowed us to modestly exceed the goal that was created for the committee in the legislation.

Nevertheless, the Democrats said no. They need $1 trillion tax increase, that's what they were interested in. We weren't interested in doing that kind of damage to our economy. So in the end why did it fail? I think there are a number of reasons, and over time, additional reasons may occur to me, but at the moment a few of the reasons – one of the fundamental reasons I think is there was an asymmetry of incentives. I can tell you the Republicans had a very powerful incentive to reach an agreement. The six of us wanted to very, very badly. And it grows from just a sense that we all have of the urgency of this crisis. I really don't think we have a great deal of time to hope that the markets are going to continue to lend money to a government that is pursuing an unsustainable fiscal policy.

I can tell you at Republican conference meetings, and I have been present now for almost a year, at virtually every single time we meet, this topic comes up. How are we going to change the fiscal path we are on? So there is a very, very strong sense of urgency on the part of Republican members of this committee and beyond. There is also, let's face it, a very, very serious concern that the alternative to the super committee's success, the sequestration of funds, hits the defense budget way too hard. And there are a lot of Republicans who are very concerned about that, and that created another incentive for us to try to find an agreement. On the other side, I think there were forces pulling the Democrats away from an agreement. Let's face it, we have a presidential campaign that is now premised on the idea that the president is running against the do-nothing Congress, never mind that half of the Congress is controlled by Democrats. That is the fundamental message of his campaign, and if the select committee had come to a great bipartisan agreement that could pass both Houses and be signed into law, it would rather muddle the message that the president is trying to run on.

In addition, let's face it, many of the Democrats have long hoped to dramatically cut the defense budget. Well, that's exactly what happens in the sequestration. So there was certainly a segment of that caucus that finds the alternative to success perfectly acceptable. And finally, there is also, I think we have all seen, a mood in the country on the part of the far left, anyway, that productive people need to be punished with a big tax increase. And so that voice was present within the Democratic caucus as well. I do want to stress there were some Democrats on the committee who I think definitely wanted to accomplish something. I just think they found it impossible to break from the left wing of their own caucus.

I think, going forward, I think it's clear what we need to do. We need to focus on maximizing economic growth. We need to focus on transforming the big drivers of our deficits into a sustainable fashion. I guess I'm going to have to vote soon. A lot of time for questions here, I see. Let me just say I think the big questions here about the size of government and the role of government and the questions that divided us at some level will await another election cycle for further clarity and guidance from the votes. But in the meantime there's some things we need to do. Number one, we absolutely need to stick to the $1.2 trillion in spending cuts that are scheduled. I think it's important they be reconfigured so they don't land disproportionately on our defense budget as they are currently scheduled, but we need to make sure that they happen.

The second thing is, we ought to accept – well, maybe we can't persuade our Democratic friends to reform the tax code – let's do the pieces that we can do. Let's try to move to a territorial system if we can. Let's close some of the egregious loopholes like the ethanol features that we voted successfully on in the Senate. On the spending side, likewise, if we couldn't agree to a big grand bargain, let's take the individual items for which there really ought to be broad bipartisan consensus – reducing corporate welfare for instance, agricultural subsidies, even asking federal employees to contribute a little bit more for their retirement benefits. These are things that both sides ought to be able to agree on. I would say if there is a silver lining to the failure of the committee, perhaps it is that we discovered, or for some of us rediscovered, that there are a great deal of places where we can have very substantial savings for taxpayers. By all means, let's do what we can. 

Transcript courtesy of Mr. Toomey's office.