Paul Ryan on the sequester and the prospects for tax reform
CNBC's Squawk Box
Joe Kernan: Joining us for his first CNBC interview since the election, Representative Paul Ryan, also Chairman of the Budget Committee. Welcome back, It's great to see you, Mr. Chairman.
Congressman Paul Ryan: Hey, Becky, Joe, and Andrew. Thanks for letting me back on your show. I appreciate it.
Joe Kernan: We've had a standing invite. It's great that you're finally with us again. I guess the first question to ask you, it looks like it's going to happen but we don't know a lot of the stuff that goes on behind the scenes that the people don't talk about. Are you aware of anything going on right now behind the scenes, that could possibly avert this or not?
Congressman Paul Ryan: Well as you know the sequester was designed to force action to deal with the deficit and debt. We passed a bill 300 days ago dealing with this and as recently as December. The Senate still has not done anything. So I do expect the sequester to take effect because the Senate has not acted and the President is around the country campaigning instead of governing here is Washington. And so what I think will happen next week is we will pass an appropriations measure that gives the administration more flexibility. We have already negotiated spending bills with respect to veterans affairs, military, and that will be part of this because those spending levels have been negotiated. So I think you will see more flexibility for the military, national security and more flexibility for domestic spending so that the President and the agencies can go after waste and inefficiency as the sequester takes place.
Joe Kernan: Can you put to rest about whether the deal was actually changed? I was under the impression that both sides at one point had agreed that this would be about actually finding having some spending cuts kick in. To then change it to a deficit reduction zeal that includes higher taxes and revenues instead of what it was intended, was that changing the rules or all’s fair in Washington?
Congressman Paul Ryan: No, I mean, we obviously believe the president moved the goalpost. I think Bob Woodward has mapped this out pretty effectively. Don’t forget, Joe, the president got the largest tax increase in American history eight weeks ago. Now he’s trying to move the goalpost and say instead of spending cuts which is what the sequester is I need a bunch of tax increases for this as well to fuel more spending. If you take these tax loopholes you’re killing tax reform. That kills our chance for economic growth and job creation. More to the point, more to the point, even with the sequester taking effect, spending will have gone up 18 percent since the president took office. So spending is the problem. The deficit’s a huge problem. We’re going to tackle this. We don’t think the sequester is the right way to do it but it’s going to happen and we will map out a budget that shows you the right way to fix our fiscal problems to grow the economy, create jobs, and prevent a debt crisis in this country.
Becky Quick: and that budget will include not only discretionary budget spending but also the full entitlements?
Congressman Paul Ryan: That’s right. You have to reform entitlements to save these programs from bankruptcy and to save this country from a debt crisis. We are the adults in the room who have been proposing this for years. The President is around the country campaigning and not coming to the table with equal proposals to deal with this. And unfortunately that is the stalemate that we have today.
Joe Kernan: Was there a time when you could have gotten together with the President and said – and I guess maybe the blunt nature of the sequester is a bad thing, maybe there is a way to do it surgically with waste or whatever – but if he had come to you and said: “look, I just don’t like the way that we’re doing it without being effective in where we are looking at cutting. I want to cut where I want to cut. Will you let me do that?” Would you have let him do that if he had not said that we need to raise revenue?
Congressman Paul Ryan: We are going to do that next week. We are going to give him more flexibility.
Joe Kernan: Are you going to give him flexibility to tax or cut?
Congressman Paul Ryan: Joe, I’ve thought about what you just asked quite a bit. I really do not think that the President was ever interested in what I call a grand bargain or a big budget deal to deal with these entitlements. He is unwilling to publically put out ideas to save these entitlements from bankruptcy and he has been more focused on campaigning against republicans. And the net result is that nothing gets done up here. So obviously that is our side from the Republican perspective but the point is we have a spending problem that we have to deal with. We are being responsible about it because the goal here is growth, a healthy economy, job creation, and the debt is really hurting that.
Becky Quick: But Paul is that a non-starter, your plan to say to the President go ahead, we will give you the discretion to cut ten percent any way you want it?
Congressman Paul Ryan: Ten percent?
Becky Quick: Well I am sorry, ten percent in the discretionary spending area and three percent overall.
Congressman Paul Ryan: Well it is about five percent on domestic discretionary spending and 7.9 percent on defense. We have already agreed to the defense spending levels with Democrats so we are going to put those bills through next week and then the sequester will hit but it already has the flexibility. And so yes, do we believe that the government which spends $3.5 trillion this year can do with $85 billion less? Yes. Do we believe that a government that spends over $100 billion a year in what we call improper payments – money that should not even be spent – can go after waste and inefficiency without raising taxes? Yes we believe that. We will give the President the tool to do that. Whether he chooses to do that or not is his choice. Unfortunately, when he keeps campaigning it makes governing that much more difficult and solutions harder. We have offered solutions. We are going to continue offering solutions. Hopefully, at the end of the day we will actually start solving some problems around here.
Andrew Ross Sorkin: Paul, the Republicans have reserved the H.R. 1 designation for a tax bill.
Congressman Paul Ryan: That’s right.
Andrew Ross Sorkin: Do you expect in this environment, given what we just lived through with the sequester, any form of real tax reforms to take place within the next 12 months?
Congressman Paul Ryan: I do not know Andrew, I really don’t. But the way that we look at it, and I am on the Ways and Means Committee, Dave Camp and I have been working on this together. It is not going to be for our lack of trying. We have the highest corporate tax rate. We now tax our successful small businesses at an effective tax rate of about 44%. Look, in Wisconsin we compete against Canada. They tax their businesses at 15%. We need, for economic growth and international competitiveness, to reform our tax system. We are going to do this in the Ways and Means Committee. We are going to do this in the House. We hope that our Senate counterparts will follow suit. There are a lot of moderate Democrats who agree with us on this. Bowles-Simpson, you name the group they think tax reform, lower rates broader base is the way to go. We are going to move this. We will see if the President follows suit but it will not be for our lack of trying because we think it is critical for jobs.
Joe Kernan: Rates are already higher. Let me just answer this one thing, Paul. We wanted the grand bargain of four trillion dollars. We had a guy on earlier that manages money that said we have already done 2.6 or 2.7. Then I got something from someone who knows. I am not going to out this guy but someone who is involved with all this. He tells me that out of the four trillion, even if the sequester goes through, we are only at 1.2 trillion that we have actually cut. You can not count the Obamacare trillion dollars because those taxes are not even going to pay for Obamacare. So at best, with the sequester we are at 1.2. We are nowhere near the four trillion. Are those the right numbers?
Congressman Paul Ryan: Those are the right numbers. The 2.6 trillion dollars is a gross number. It ignores all of the deficit spending and deficit increases that occurred under the President’s stimulus, payroll tax cuts, and increase in domestic discretionary spending. So they are giving you gross, not net, deficit reduction. So yes, we are not even close to fixing this problem but that’s what really concerns me Joe. When you hear the President at the State of the Union and at these campaign rallies around the country saying the job of deficit reduction is almost complete? That is very worrisome to me because it tells me that he is in complete denial. We have to get ahead of this problem before it tackles us like it is happening in Europe. That is the concern we have and that is why we are going to continue to offer solutions.
Andrew Ross Sorkin: Paul I just want to go back, if I could, to the tax issue because we have so many businesses people and CEOs on this show that want tax reform both in the cooperate sphere and on the personal side. Given what seems to be a rather large divide in Washington over how to do this and whether there is an ability to raise revenue. My question for you is there an ability to effectively lower the top tax rates but as you talked about once you remove the loopholes to at least either keep revenues level or grow them or maybe it is effectively making the average effective tax rate higher or the same. Is that something that you would be in favor of or do you think that rates and effective tax rates ultimately have to become lower.
Congressman Paul Ryan: Well I think rates and effective tax rates ought to converge in tax reform. That is the whole point of base broadening and rate lowering. We want to have tax rates that are internationally competitive. That means that they have to be twenty something. We run a lot of numbers around here. If you give away more loopholes for spending, which is what the President is calling for; you are making that an impossible job to accomplish. You already got a big tax increase which gives you a higher revenue baseline. That base broadening is gone. So we believe with the current revenues that we have, and I know I am getting a little technical here, we believe that we can what you just described: lower rates with a broader base without losing revenue and having an internationally competitive tax system. If you keep giving away those loopholes to fuel more spending you will never get that. We are pretty much on that bubble there and that is why we are saying lets do tax reform and hold loopholes to pay for tax reform. Meanwhile, spending is the problem. Let’s focus on spending. So if we stop campaigning and start governing and coming together with solutions, I really believe that we can fix this problem. Unfortunately we control one third of the power arrangement here. We are in the minority, we are the ones passing these bills, offering these solutions and we have nothing to pass on the other side. We have no other solutions being offered. It is hard to get things done that way.
Becky Quick: Chairman Ryan, we watch a lot of polls and try to get a feel for what the public would like to see here and a lot of it seems to me that the way you ask the question you will get a different answer on this. It is still unclear to me where the public stands on this.
Congressman Paul Ryan: That is because they are watching Ben Bernanke hearings these days.
Becky Quick: Well it is still unclear to me what the public feels about this. It seems that most people are in agreement that they would like to see spending cuts. A lot of them still say that they would like to see some cooperation between both sides. I think it really depends on how you ask those questions. Next week, once the sequester kicks in, once you start to see things like longer delays at the airport and you see the threat of meat inspectors from the agriculture department getting laid off. Do you expect to have massive pressure, from many of your districts, to go back to the table and renegotiate? Will the Republicans change their stance at that point?
Congressman Paul Ryan: This reminds me of when your local school board is saying we need this new tax increase and if we don’t get it we are going to have to cut the high school band and the football team first. We call it the Washington Monument effect here. We are going to give the Administration the flexibility they need to not do those things that you just said and go after the waste, the fraud, and the abuse; low priority spending. If they choose not to do that then the President will have made the choice, to do the things that you just described, for political benefits. We think that is wrong. We will see if he does that. The fact is Becky, we cannot keep spending money that we just don’t have. We have got to get this deficit and debt under control, not because we just like numbers adding up but because it is necessary for growth and a healthy economy. Then we are going to show how you balance the budget to create jobs. We will show that in a few weeks. This to me is what matters most. So we will give the Administration the flexibility but no we are not going to walk away from the only chance of getting spending under control around here When push comes to shove, we will see if the Administration uses the flexibility or not. If they choose not to then I would basically say that the President is just still out there campaigning trying to maximize political benefit for his ends instead of coming here and getting solutions.