Pennsylvania Sen. Pat Toomey, a Lehigh Valley Republican who won his second statewide contest in November, says he is ready to take on tax reform when the Senate comes back to Washington this month.
The fiscal hawk who sits on both the Senate Budget and Finance committees and once chaired the Club for Growth said behind all of the noise of daily politics, he has been in regular communication with the White House and is working with House members as well to address how best to get tax reform passed.
"I will say, the administration has been terrific about reaching out to interested senators to make sure we have a dialogue," he told the Washington Examiner.
Toomey rose early in his career in 2011 when then-Minority Leader Mitch McConnell tapped him as a freshman to a new congressional "super committee" charged with writing a plan to reduce the country's mounting deficits.
Toomey has been vocal on things he wants to accomplish: Repealing Obamacare, rolling back regulations, and tax reform. He has also said President Trump gets in his own way when he goes off-message and loses opportunities to be an effective spokesman for his own agenda.
Still, he says he is impressed with the efforts the Trump administration has put into getting tax reform passed. He lays out who benefits from tax reform, the challenges the issue faces, and what the economy would ultimately look like with comprehensive reform.
Washington Examiner: Give an overview of how tax reform would impact ordinary people in their daily lives. Why should they care or get behind this?
Toomey: I would say, people could think about it on several levels. One would be at a macro level. If we do tax reform right — and if we do I think the economy surges and grows, instead of growing at merely 2 percent or below 2 percent, which has been the norm these last several years for the average person — it means businesses are expanding, and if businesses are expanding, they need to hire more workers. At some point, there will be a shortage of workers and so wages go up to attract workers. All of this means people have more job opportunities and higher wages.
And higher wages means, of course, a better standard of living, better quality of life, more options, more freedom. That's the macro effect. At the micro level, let's go back to what happens if we get the incentives right, then more businesses invest more capital. Investments in capital is how a worker makes themselves more valuable by being able to deploy that capital. It's the reason a guy who's operating a backhoe gets paid more than the guy who's swinging a shovel. They're both working. You could argue the guy with the shovel is working harder in some ways, but he doesn't get paid as much because he's not putting capital to work.
This has been the hallmark of this weak recovery. It's been lack of sufficient invested capital because business didn't have the confidence in the regulatory environment under President Obama. And now, the tax code continues to be a real impediment. If we free that up and encourage that capital, investments are going to be very, very good for workers.
Washington Examiner: How have the current tax policies impacted competition for bigger businesses and with competing countries?
Toomey: In two major respects, we have a very uncompetitive tax code, where we systemically put large American companies, especially multinational headquarters in the United States, at a big competitive disadvantage. One is a very high marginal tax rate, while the rest of the world's taxes, their business income at an average is at say 20 to 22 percent. Our top rate is 35 percent. Right out of the box, if you are thinking about where you want to be headquartered, you gotta ask yourself, "Why do I want to be in the place with the highest of all the tax rates?" But it's worse than that because in addition to a very high marginal rate, we are almost unique among industrialized countries in taxing a business as global income rather than just income that is generated within our borders.
If you think about it, if a French company has a subsidiary in Ireland and that subsidiary makes a profit, after they paid their taxes to the Irish government, they can bring the money back home to France and pay virtually no additional tax. They have every reason to do that. But in America, after paying the tax to Ireland, which is 12.5 percent, we then say, if you want to bring that money back to the United States, back to the parent company headquartered in America, we're going to charge you the difference between the 35 percent we charge here and a 12.5 percent you paid. So, you pay another 18 percent or 17.5 percent whatever it is, 23 percent, in this case, for bringing the money back.
Well, first of all, that's why many American multinationals have not brought the money back. It's sitting overseas. It's getting invested in Europe and Asia instead of being invested in the United States. Secondly, it creates an incentive to have your multinational headquartered company somewhere other than America, which is why we see these corporate inversions. Then, thirdly, if it makes good sense for an American company to acquire a company overseas, we're almost always at a competitive disadvantage in making the acquisition because the American companies, after tax return on that investment, is going to be worse than someone headquartered almost anywhere else.
All of those factors make us much less competitive. And if we're less competitive, that means we're not selling as many goods and services around the world, which means we're not employing as many Americans to do that. It's one of the highest priorities, in my mind, for tax reform.
Washington Examiner: What are some of the challenges you face in enacting a pro-growth tax reform?
Toomey: Great question. I think the biggest challenge by far is going to be whether or not Republican senators and House members can agree that the reform does not have to be revenue-neutral. If we insist that is has to score, according to [the Congressional Budget Office] and joint tax, as a revenue-neutral reform, even with what they consider a dynamic score, which is likely to be just slightly dynamic, then we're going to constrain ourselves too much. Think about it this way. I think that our top corporation should be no higher than 20 percent. Well, today, it's 35 percent. To move that down to 25 percent, there's a certain amount of foregone revenue. I think we'll make up for that with the revenue we get by taxing the incremental growth in the economy.
But if we hold ourselves to something that's gotta be revenue-neutral, we're never going to get that top corporate down to 20 percent. We'll be lucky to get it below 30 percent just because the arithmetic becomes just very, very difficult.
I like to remind my colleagues, separate and apart from Obamacare, the Obama administration inflicted a $600 billion-plus tax increase on the American people that Republicans didn't support. Why should we feel obligated to keep that in the mix? Shouldn't the basic part of our baseline be to take that revenue stream out of the federal government's hands? I would also point out that revenue collected by the federal government, tax revenue, is higher than its historical average as a percentage of our economy. It's at an all-time record high in terms of dollars, but even as a percentage of our economy, it's unusually high.
Why should we feel obliged to lock that in? I don't think we should. I think the goal should be to maximize growth and accept the fact that using the conventional scoring methodologies of Washington will appear to increase the deficit. I think in time, it'll actually shrink the deficit because of the greater economic growth.
That's the resolution that gives reconciliation instructions to the tax writing committees so that we can pass subsequent tax reform with a simple majority vote in the Senate. The Democrats are not interested in working with us on tax reforms, so we're going to have to do it ourselves. That has to start with a budget resolution and I'm on the budget committee. I'm also on the finance committee, which is the committee that will have the responsibility to then take those reconciliation instructions and turn it into a tax bill. That kind of puts me with other colleagues at the center of this process and I really hope that we get a good result.
Washington Examiner: You don't see any Democrats coming on board with this?
Toomey: Might we get one or two Democrats? Sure. Will we get eight so that we could get to 60 votes? I very, very much doubt it. Unfortunately, a lot of Democrats spend an awful lot of time vilifying corporate America, when one of the most important things we can do here is lower the top rate on corporate income. Well, that's a hard thing to sign up for if you spend all your time bashing these people.
There definitely are some Democrats who understand that this needs to happen, but the idea that the leadership on the Democrat side is going to allow eight Democrats to join the Republicans to do bipartisan permanent tax reform, I'm deeply skeptical.
Washington Examiner: Can you get those done with 51 votes instead of the usually 60-vote requirement or no?
Toomey: The answer is yes. If we use a budget resolution. That gives reconciliation instructions to the committees of jurisdiction, then the answer is yes.
Washington Examiner: Since you're on the budget committee and the finance committee, have you been working with the staff members from the White House on what this might look like?
Toomey: Absolutely. I have had many conversations with the Treasury secretary [Steve Mnuchin], with Gary Cohn [director of the president's National Economic Council]. Our staffs have been in regular communication and we're working with House members who are interested and participants in this as well. I will say, the administration has been terrific about reaching out to interested senators to make sure we have a dialogue. You notice that we don't have three different bills. The House came up with a blueprint, which I give them a lot of credit for a lot of thoughtful work. That was constructive, but it's better not to have a Senate tax reform bill, a House bill, and a White House bill and then have everybody defending their product with pride of authorship. Instead, we're trying to get to the same page where we're in agreement on a single program. I think we're heading in that direction.
Washington Examiner: You consider that good news?
Toomey: I think it is. Yeah. I'm cautiously optimistic. I am worried about whether we get everybody on board with the idea that it's OK if this is not revenue-neutral. That's a big threshold issue for us that is not yet resolved and I just hope we don't put ourselves in that box.
Washington Examiner: What's the best way to sell that idea?
Toomey: I think the best way is, number one, you maximize economic growth if you're not in that box. If you put yourself in that box, the tax reform is likely to be pretty weak tea and not enough reform, not enough reduction in rates, for instance, to generate the economic growth our economy is capable of and we all want to deliver. That's one, that's the most important aspect of selling it.
But the other would be the two arguments I made earlier. Number one, why do we want to lock in the Obama tax increase? And number two, why not make it a tax cut when the federal government is taking in an unusually large percentage of the economy as tax revenue as it is?
Washington Examiner: What are your thoughts about making tax reform temporary?
Toomey: Well, permanent is much, much better than temporary. Long term is better than short term. I've argued for a longer budget window because one of the constraints we have, because the Democrats won't work with us to get to 60 votes, [which makes it] the constraining feature in the budget resolution. But, the rule is, we can increase the deficit as much as we want during the budget window. Historically, we've used a 10-year budget window. But any lost revenue, relative to current projections outside the budget window, beyond the budget window, is not permissible. And if we wrote a bill that did that, it would not get the 51-vote treatment on the Senate floor. I've argued then let's do a longer budget resolution. Let's do a budget window that's 20 years or 25 years so that we can really have a long term pro-growth reform. That, I guess, has been met with considerable support from the administration. You could look at the testimony that [Treasury Secretary Steve] Mnuchin and [Office of Management and Budget Director Mick] Mulvaney testified earlier this year. I have to get that count, what they said about that. But there has been some resistance as well from especially House leadership who's not confident that they have the votes at this point to pass that. It's complicated. But the longer we can have solidly pro-growth policy on the books, the better.
Washington Examiner: How do you turn off the noise of social media and all the conflict with politics to be able to get things done?
Toomey: I think all you have to do is look back at the last election. President Trump was not terribly specific about too many things. He was pretty specific about some immigration-related issues. And he was very specific about a big tax reform and a new tax cut, and he got elected. So, of course, there's going to be noise. Of course, there's going to be criticism.
But Republicans won the Senate, Republicans won the House, and a Republican promising tax reform and lower taxes won the White House. That's how we resolve these things in America, is we have elections. Well, we had one, and we got a mandate to get this done, so we should do it.