“Principle and prudence,” said Rep. Paul Ryan, when asked how Republicans should proceed after losing the 2012 election. “We have to exercise our principles in a prudent way with realistic expectations while being reasonable and doing what we think is right. That means our tactics will vary but our strategy will stay the same.”
Ryan was speaking in the Senate room at the Madison Hotel. The occasion was a breakfast put on by the Wall Street Journal, and over a croissant and some fruit, the House Budget Chairman went into great detail on that strategy. It included a lot of sticking to principle. It was a bit tougher to see where the prudence came in.
The key to understanding the House Republicans’ mindset, Ryan said, was that “our value-add to the political system on all things is to help prevent a debt crisis.” But it quickly became clear that the Republican Party’s fear of a debt crisis lags far behind their fear of further tax revenue. For House Republicans, it’s spending cuts or nothing. Actually, I shouldn’t say nothing. It’s spending cuts or House Republicans force another kind of crisis.
Asked where Republicans will get the leverage to force a spending-cuts only plan after losing an election, Ryan ticked off the coming moments when House Republicans could, by refusing to pass legislation, hurt the economy. “We have a sequester kicking in on March the 1st. We have a continuing resolution expiring on March the 27th. We have budgets that, if the Senate decides to do its job this year, will come out in April, so we can have a debate about how to fix the problem, not if to fix the problem, and you have a debt limit coming right after that.”
The points of leverage, in other words, are crises. The sequester is full of dumb spending cuts that will wound the recovery. If the continuing resolution runs out without being replaced or renewed, the government will shut down. If the debt ceiling is breached, the economy will fall into chaos.
None of this has to happen, of course. Democrats have said that they’re open to a package that cuts the deficit through further spending cuts and tax increases. But Ryan isn’t.
Lori Montgomery, a Washington Post reporter, asked Ryan whether he was absolutely ruling out a deficit-reduction compromise with Senate Democrats that included new revenues, even if they came through tax reform. “Yes,” Ryan said. “We want to use reconciliation to get revenue-neutral tax reform.”
“But there’s a Democratic Senate you need to work with,” replied Montgomery.
“They already got their revenues,” Ryan said. “So what, we’ll roll over and they get more revenues? That’s not how it works. In the spirit of bipartisan compromise, they’ve gotten revenue increases already. We’ve yet to get anything as a result of it. It used to be 3-1. Isn’t that what Erskine says? $3 of spending cuts to every dollar of tax increase. The president in his own budget last year claimed 2.5 to 1. We’d argue with whether they actually achieved that, but where’s the 3? Where’s the two-and-a-half? Where’s the $1.8 trillion in cuts?”
As Montgomery reminded Ryan, though, Republicans got more than $1.8 trillion in spending cuts during the last session of Congress. “You got — what is it? — $2.2 trillion, $2.4 trillion between the [Budget Control Act] and the sequester?”
“That was last session,” Ryan said. “We’re going forward now.”
Ryan’s wrong on that. Both the $630 billion in revenue that Democrats got as part of the fiscal cliff deal and the $2.2 trillion (or so) that Republicans got as part of the Budget Control Act both passed as part of the 112th Congress. The House approved the fiscal cliff deal Jan. 1, and President Obama signed the bill into law Jan. 2. The 113th Congress didn’t begin until Jan. 3. So neither side has gotten anything in this session of Congress.
Ryan and the Republicans, of course, aren’t likely to find that logic persuasive. They don’t want more tax revenue because, well, they don’t want more tax revenue. That’s the “principle” behind their approach. So that was my question for Ryan.
“What is the evidence,” I asked, “be it historical or academic, underneath the idea that bringing another $600 billion or $700 billion out of tax expenditures — which some Republicans, like Alan Greenspan, think is properly classified as spending anyway — what is the evidence that makes you convinced that would have such a deleterious effect on the economy that it wouldn’t be worth taking it to get the debt deal?”
“I think rates matter,” Ryan replied. “I think the statutory rate matters at the end of the day.”
“But you could have the same or lower rate there,” I said. After all, if you’re closing loopholes, the top marginal tax rate doesn’t change.
“I don’t know about that,” said Ryan. “Remember, we have to write these things statically. We don’t use macroeconomic feedback on the Joint Tax Committee.”
“But if you capped deductions at $15,000,” I pressed, “that wouldn’t change rates.”
Ryan didn’t budge. “You have to decide where you want to cap deduction or which deductions stay or go, what will pass, and what the resulting rates will be. The other problem I’ve noticed — and this is just experience from my 15 years in Congress — every time you give a little revenue, it just goes to spending. The spending cuts are always later and the revenue gets pocketed. It’s one of those fool me once, shame on you, fool me twice, shame on me.”
“The revenues — they’ve already gotten revenues. We still have not done what we need to do to get this debt and deficit under control. You cannot fix this problem through revenues. You have to fix it through real entitlement reforms. And, yes, actual spending cuts. And that stuff, Ezra, when you hear the rhetoric and see the lack of effort to tackle these things from the other side, why should we think they’ll actually put this up when all they want to do is pocket revenues and not cut spending and reform entitlements. And by the way, I think that revenue level is way too high, I don’t see how you get there.”
All of that is valuable insight into why Republicans don’t want to cut a deal that includes further revenues, though the evidence doesn’t support Ryan’s contention that spending cuts don’t stick. Still, my question was about where Ryan’s empirical backing comes from. So I tried again. “Assuming you could write a deal with both revenues and spending cuts, which I believe you can do, what is the study that makes you concerned about it?”
“I always believed you could get higher revenues through tax reform,” he replied. “There isn’t an axiomatic sweet spot here. But we do believe growth occurs on the margin. Rates matter. And especially in the 21st century, where we have more tax competition, where we have the highest corporate rate in the industrialized world, where other countries don’t really have a pass-through income system like we do, where most of our businesses are pass-through, and therefore their rates are really high compared to their competitors. Canada lowered their rates to 15 percent on all their businesses. Where I come from, we compete against Canadians. And our top rate is going north of 40 percent now. It’s pretty tough to tell a Wisconsin manufacturer, good luck when you’re being taxed at 40 percent and they’re taxed at 15 percent. These rates, which are new in this century, matter even more in an era of global competition.”
Sadly, the microphone then went to another reporter, so I couldn’t follow-up further. But it’s worth making a few points on Ryan’s answer. First, he didn’t actually provide a study or historical experience underlying his opposition to revenue-increasing tax reform. Second, while it’s true our statutory corporate rate is very high, the actual rate corporations pay is far lower, and either way, this doesn’t argue against tax reform on the individual side. Third, according to the World Economic Forum, we remain more competitive than Canada, even with our current tax code. And fourth, Ryan’s argument would seem to imply that spending cuts made as part of deals with Democrats are simply fake, and as such, it’s hard to understand why Republicans are willing to risk so much to secure them.
Throughout the breakfast, Ryan was genial while being utterly inflexible. But think back to what he said at the beginning. Typically, politicians say that their job requires balancing principle with compromise. Ryan’s formulation was principle and prudence. The principles are clear. The prudence, given the recent history of the House Republicans, means knowing when to stop saying no, with the decision to fold on the debt ceiling being a prime example. At one point, Ryan was asked whether Republicans could really stick to this strategy given their low poll numbers and tattered brand. “So,” he laughed, “we don’t have much to lose, do we?”