Yesterday on the Senate floor, Senator Jon Kyl (R-Ariz.) firmly and decisively took tax increases off the table in any debt limit negotiations.  Instead, he wisely called for a separate discussion on fundamental, pro-growth tax reform.  This discussion should be about lowering tax rates and broadening the tax base in a way that is (at worst) tax-revenue neutral.  Below are excerpts from his remarks:

Pro-growth, revenue-neutral tax reform–not tax hikes

Another question that has arisen is whether it would be helpful in this connection to raise taxes. I have said, and the Republican side has said, we will not do that as part of this exercise in extending the debt ceiling. There may come a point in time later this year or next year where all of us would get together and engage in what some have called fundamental tax reform–or I like to call it pro-growth tax reform because I think a lot of economists believe our Tax Code today is not conducive to economic growth, and were we to make it much simpler and do things such as reducing the corporate tax rate, for example, we can be much more competitive with our foreign trading partners. The President himself has made the point that we can reduce the corporate tax rate were we to eliminate what some call loopholes, and thereby reduce the amount of money we have to collect through the tax rate itself. This is a potential when we get into that kind of reform.

I want to distinguish the point of rebalancing our Tax Code to get a progrowth kind of Tax Code with the possibility of generating more revenue to deal with our debt situation. Those are two totally different situations. While I would be very much in favor of taking a look at these tax expenditures, various subsidies, for example, to different groups to see whether we could reduce some of those, thereby reduce tax rates in a revenue-neutral manner so our Tax Code would be more conducive to growth, but in a revenue-neutral manner, meaning not in order to raise revenues but in order to have a more sensible Tax Code so we can be more competitive with our trading partners, for example, that is what the President, as I understand it, proposed relative to our corporate tax rate, which is the highest in the world today. If we can get that down from 35 percent to 20 or 25 percent, we can be much more competitive with our trading partners.

One way is to reduce so-called tax expenditures. To give an example or two, we have significant tax credits and deductions that are taken for the production of things such as ethanol or for production of certain kinds of weather stripping equipment or solar energy equipment. This is an effort to promote so-called green energy. Those are pretty big subsidies. They are tax credits or deductions called tax expenditures. Were some of those to be eliminated or reduced, then we can offset that increase in revenue with a reduction in the tax rate and still have as much revenue coming into the Treasury but have a more sensible Tax Code.

Let's contrast that with the situation on the debt ceiling question because that is the one before us right now. We are going to have to act on the debt ceiling in the next couple of months or so. The question is, How should we deal with our ballooning deficits and debt in order to warrant increasing the debt ceiling above what it is today? The answer, of course, is to reduce spending, not raise revenues or increase taxes.

I don't think anybody is suggesting increasing revenues by increasing tax rates. But some people have said we can eliminate some of these loopholes or tax expenditures, and that is a way to collect more revenue. If a company cannot take a certain credit or deduction, it is going to have to pay more in taxes.

I wish to make the point that, no if we are going to get into that kind of discussion, we should do it in the context of reforming our Tax Code so we can use those increased revenues in order to reduce the tax rates, as I said before, so that our country can be more competitive.

That is the context in which we should be discussing the reduction or elimination of some of these so-called tax expenditures.

Washington has an over-spending problem, not an under-taxing problem

Just in looking at this in an abstract way–and I will get more specific about numbers–our problem is spending. We have increased spending so much more than it has ever been in the past that we are getting very deep in debt.

To just give a comparison, spending is over 25 percent of GDP. That is the amount we are now spending at the Federal Government level. Our historic level is just above 20 percent of the GDP. That is an enormous increase in the amount of spending by this country. Some will point out that the revenues collected by the Treasury are also down, and that has contributed to the deficit. To some extent that is true. What are the reasons? It is primarily because of the recession that we have been in since the end of 2006–the decrease in the amount of money that individuals and businesses are making, and therefore a reduction in the revenues collected as taxes by the IRS. So revenues are down, but it is due to the recession that we have. We have not cut tax rates in the last few years–since 2006–for example.

The last time we had any kind of tax reduction was as a result of the 2001 and 2003 so-called Bush tax cuts. But we were generating a lot of revenue in this country before the recession. The recession caused us to generate less as families, as State and local governments, and as the Federal Government. But CBO figures demonstrate that under any of the budgets offered, including the Obama budget, we will be back to historic average levels of tax collections in just the next few years…the tax collections in this country have averaged between 18 and 19 percent of GDP. The spending has been a little above 20 percent. So the revenues are going to get back up to that 18 or 19 percent under any of the budgets that have been suggested–the Ryan budget, the Obama budget, and others.

The problem is spending. Under the Obama budget, spending never gets below 23 percent of the gross domestic product. In the Ryan budget, it goes from the 25 percent that we are at today to below 20 percent. I think that after 10 years, in the Ryan budget passed by the House of Representatives, it is about 19.1 percent of the gross domestic product. That is a way to get spending down to historic levels. Revenues will be back up to historic levels, and that is the way we have both a vibrant economy and we produce the revenues the Federal Government needs to operate without having to borrow 40 cents or 42 cents on every dollar as we have to do today.

Tax increases need to be off the table

When we are talking about how to get the budget better balanced, how to reduce our deficits, we should not be looking at the revenue side or the taxing side; we should be looking at the spending side. On spending, we know the big money is in the entitlements, not the discretionary part of the budget.

One of the reasons I wanted to discuss this on the floor today is because there is some misunderstanding of comments I made on television yesterday, and I think it is easy to misunderstand people when they talk about raising revenue in the context of dealing with a budget deficit. Republicans are simply not going to raise tax rates in order to try to reduce this deficit with more revenue as opposed to savings. It is much different to talk about that than it is to say there are tax expenditures we can deal with, and if we can eliminate those or reduce them, then we can also reduce our tax rates and make our Tax Code more competitive.

That makes a perfect amount of sense. But I don't think we will be able to do that within the next 2 months. My guess is it is either going to be later this fall or early next year before we are able to achieve that kind of bipartisan revision of our Tax Code, if we can even do it then. I hope we can because I think there is a recognition by a lot of folks that there are a lot of these tax expenditures in the code that do not need to be in the code. They pick winners and losers. The more we can do away with and thereby reduce tax rates, the better off we will be. I am hopeful we will, through these bipartisan negotiations, be able to come together on significant savings.