Transcript: Sen. Kyl, Rep. Ryan on 'FOX News Sunday'

The following is a rush transcript of the March 1, 2009, edition of "FOX News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

CHRIS WALLACE, HOST: Depending on your point of view, President Obama's new budget is a statement of our national values or a socialist experiment, which shows just how fierce the debate on Capitol Hill will be.

Joining us to discuss the plan are two Republican leaders, the number two Republican in the Senate, Jon Kyl, is in Phoenix, and Congressman Paul Ryan, the top Republican on the House Budget Committee, joins us here in Washington.

Gentlemen, before we get into the details, I'd like to get an overview from both of you.

Senator Kyl, how big a change in direction does the Obama budget represent in the relationship between government and the American people?

SEN. JON KYL, R-ARIZ.: Chris, I was going to quote this a little later, but since you asked the question that way, let me just quote from the Wall Street Journal on Friday, which certainly captures my sentiment. They said the budget represents a historical shift in the ideological direction of U.S. economic policy.

And then in their editorial, they say President Obama is attempting to expand the role of government to such a dominant position that its power can never be rolled back.

I think it's terrifying in the policy implications as well as mind- boggling in the numbers.

WALLACE: Congressman Ryan, fair to say that the Obama budget is radical in the same sense that Ronald Reagan's was radical, FDR's was radical, Lyndon Johnson's was radical?

REP. PAUL RYAN, R-WISC.: It's a breathtaking budget. This is probably the biggest rewrite or transformation of our federal budget since the New Deal. And that's not necessarily surprising. I mean, the president said he was going to bring us sweeping change, transformation.

What surprises me most about this budget, though, is that they would bring this out in the middle of a recession. This budget takes the size of our government in this year to the largest level it has been since World War II.

It's got a $1.4 trillion tax increase in it, in the middle of a recession. It doubles the debt in eight years. It never balances the budget. In fact, it proposes for the next 10 years that our deficits are the highest we've ever had on record.

WALLACE: But, gentlemen — and let me take the flip side of that argument, Congressman Ryan — we're in a crisis. We just learned on Friday that the GDP in the fourth quarter contracted by 6.2 percent, the worst number since 1982.

And while President Obama offers, whether you like them or not, sweeping proposals, what we hear from Republicans is the same old talk about spending restraint and tax cuts.

Don't — what are your new ideas? What are the ways in which — we're in an unprecedented situation. What are your new ideas for getting us out of it?

RYAN: We will be bringing an alternative. And it's not just enough for us to criticize. We're going to be bringing a full alternative budget to the floor in April to show how we would do things differently.

But the first thing you don't do is raise taxes in a recession. And if you think these tax increases...

WALLACE: But wait But let me just hit you on the taxes issue, because the White House says...

RYAN: So we would — we would cut taxes.

WALLACE: ... the White House says...

RYAN: If you're asking me...

WALLACE: ... that the — that the taxes are going to be raised only in 2011. So it wouldn't happen during the next two years.

RYAN: Let me get this straight. So the small business, the entrepreneur that's thinking about expanding, about whether to hire or fire people — they have these huge tax increases coming in about a year and a half's time. That's not going to affect their decision- making?

The assets that go into our pension funds, our 401(k)s — huge tax increases on those in about a year and a half time? You don't think that's going to affect people's wealth, people's retirement funds?

And this cap and tax idea, this carbon cap and tax idea — we're going to bring this huge tax increase on the energy and manufacturing sector of America in just a couple of years. You don't think that's going to affect the economy today? That affects planning. That affects small businesses. You know, more than half of the people who pay these higher taxes are the small businesses of America, which produce 70 percent of our jobs.

So doing this now, saying in a couple of years this huge slew of spending and tax increases are coming — that doesn't affect the economy then. It also affects the economy now.

WALLACE: Senator Kyl, let me bring you into this discussion. President Obama discussed the issue of taxes in his speech to Congress this week. Let's watch what he had to say.


PRESIDENT OBAMA: If your family earns less than $250,000 a year, a quarter million dollars a year, you will not see your taxes increase a single dime — I repeat, not one single dime.



WALLACE: Senator Kyl, at a time when income inequality has grown dramatically over the course of the last 10 years, what's wrong with increasing taxes on just the top 2 percent of wage earners?

KYL: Three points. First of all, he's not correct when he says you won't see your taxes go up. As Paul Ryan just pointed out, this new energy tax hits everybody.

Unless you never buy any gasoline, or you never use any electricity in your home, or you never buy anything that was made with this energy — which is, of course, absurd — it'll hit every single person.

And in fact, it's regressive because a higher percentage of the income of lower-income families is spent on these things than with the higher income people.

Secondly, the tax on the upper income — it has a direct and dramatic impact on job creation. As Paul pointed out, about two- thirds of the businesses report small business income, and small businesses create 80 percent of the jobs in the country. So you're directly punishing job creation with this kind of — of huge tax policy.

And finally, in your question, you're basically assuming, Chris, the Obama philosophy of income redistribution as the basis for tax policy. It should not be. Tax policy should be to provide what the government needs without harming the economy and American families.

Today the people he's talking about, the 250,000 and above, pay 60 percent of the income taxes in the United States — 60 percent. So how much more do you want this top 2 percent to pay?

There's a point at which when you continue to tax them, they no longer produce the jobs that they're producing in this country. So it's bad policy.

WALLACE: But let's talk about this, Congressman Ryan, from a practical political view, because what the Obama administration would say is, "Yes, we are going to have this carbon tax or this cap and trade," which one can argue is a tax, "and that is going to get passed on, but on the other hand we're going to take that money and we're going to use it for our middle-class tax cuts."

So again, the point is why shouldn't the middle class support a system under which the top wage earners or the top taxpayers are going to pay more, but they're going to get a tax cut?

RYAN: A couple of things. Under this bill, small businesses will pay a higher tax rate than the largest corporations in America pay.

Number two, this tax cut for middle-class families amounts to about 14 to 20 bucks a week. You're going to see energy prices, energy costs, go up by far more than that, so middle-class people are going to get hit with this as well.

If people don't think that this is only going to tax rich people, I've got some old lottery tickets I'd like to sell them. This tax is going to hit every consumer in the economy.

But more to the point, the engine of economic growth in America is small businesses. It's entrepreneurs. It's the people who start from new ideas and start businesses. This raises their taxes.

So it's not just Brett Favre and Bill Gates. It is those mom- and-pop small businesses that start with 10 employees and maybe grow into 110 employees. Those are the people that are going to get hit with these kinds of taxes. And that is what is struggling in this economy right now.

WALLACE: All right. Let's turn to the — to the huge increase in spending, which is another part of the Obama budget.

Congressman Ryan, the president calls it — and everybody uses their phrases — a long-term investment in the economy. Will you at least grant him that we have been talking for years about reforming health care?

RYAN: That's right.

WALLACE: We've been talking for years, for 30 years, about — let's do something to build up alternative energy so we're not dependent on foreign oil. At least he's prepared to do it.

RYAN: Yeah. I think the way that they're preparing it, though, is to have the federal government more or less micro manage these two sectors of our economy, energy and health care. That's 25 percent of our economy right there.

We spend more than 2.5 times per person on health care than any other country, yet we have all these 47 million who are uninsured. Throwing more money at the problem has not been the answer.

We can have universal access to affordable health insurance in America without having the government run it. So we're going to be offering alternatives on how you can achieve this without spending a trillion or so dollars, as this budget proposes to do.

The concern that I have with this budget in the macro sense is it's almost as if we're relocating the headquarters of the American economy from Main Street, from New York, from Chicago, from Silicon Valley, to Washington, D.C. and putting Washington, D.C. in the driver's seat of the American economy.

That is not what we've done in this country. That's what they do in Europe, and it doesn't work very well.

WALLACE: Part of your party's problem, Senator Kyl, and I think you'd agree with this, is that the GOP has lost credibility on the issue of spending restraint.

For instance, Congress is in the process of passing a $410 billion spending bill to basically pay for the government over the course of the next year, with almost 9,000 earmarks in it, but 40 percent of those earmarks are Republican earmarks.

And we're putting up on the screen, Senator, your earmarks, a long list of them, according to the Taxpayers for Common Sense, totaling $118 million.

Question — I think it's a fair one — who are you to lecture the Democrats on spending?

KYL: Well, first of all, I don't see on the screen what you're talking about. I can defend everything that I have recommended in the budget, and I would suggest that they're not earmarks under the definition, because we have a specific definition.

Let me make another point. I don't think you can contend anymore — you could have in the election three years ago — that Republicans should be slapped on the hand for spending, because we were in charge of the Congress.

We haven't been in charge of the Congress now for the last two- plus years, and what you talk about in this omnibus appropriation bill is the result of the Democrats deciding to only fund the government for the first half of the year, waiting for President Obama to come in and therefore fund the second half that starts next March — or this current March, with the second half of the budget.

That's where this omnibus appropriation bill comes in that adds 8 percent more spending on top of the over trillion dollars of spending in the so-called stimulus bill.

Every House member and all but three Republicans in the Senate who are Republicans opposed that. So I don't think you can put that spending on Republicans. And one more point I'd like to make. This isn't just an abstract proposition. This budget adds more debt to our country's future than all of the debt from 1789 when George Washington was president right up through Franklin Roosevelt and — and Lyndon Johnson and George W. Bush.

In other words, in just the 10 years of this budget, we will have more than doubled the debt of the United States of America from its 220-year history.

WALLACE: Senator Kyl, Senator Kyl, we're running out of time, and I don't mean to interrupt, but I do want to get to a couple of other questions.

Can Republicans block the Obama budget, especially given the fact that there's no filibuster in the Senate on a number of budget reconciliation votes?

KYL: Well, that's a good question. This is why the American people need to understand what's in this budget and hopefully act before it's too late.

Because of the control that would be exerted over health care, and energy, and education, and our financial institutions — all of these things are critical for the American people to bring pressure to bear on the Congress.

And if they're able to do that, then I think there is a chance for us to be able to stop at least the most egregious parts of this budget, but it will take the involvement of the American people to understand it and then to let their representatives know what they think.

WALLACE: But you're saying the 41 Republicans can't stop it?

KYL: No, I hope that we can. But that means that all of us will have to be together on this, and there are only 41 of us. So we have to be absolutely united on this, and we will be, if the American people convey to all of us their desire that we get a handle on this budget and that they care about the future of our country enough that we should stop the most egregious parts of it.

WALLACE: And let me — and let me bring in Congressman Ryan on the last 30 seconds.

In the House, there's nothing you can do to stop it, is there?

RYAN: No. No. Look, your earlier question — the House Republicans - - House Republicans were amateur big spenders, and we have a mixed record, and we've got to clean that up.

We've got the professionals in charge now. We had a fiscal responsibility summit on Monday and then we passed 9,000 earmarks on Wednesday. You can't stop this in the House. It is a complete majority rule. It's going to be very difficult to stop this in the Senate. Only if a few Senate Republicans — I mean, Senate Democrats turn — turn their votes and vote with the Republicans can this thing be stopped, in my opinion.

WALLACE: You don't think that the 41 Republicans in the Senate...

RYAN: It's going to be tough. I think you're going to have to get a few southern Democrats, probably, conservative Democrats, to say, "We're against this incredible expansion of government, this massive tax increase in a recession." And if you can get a few Democrats to turn, then I think you can slow this thing down. If not, I don't — I'm not sure you can.

WALLACE: Congressman Ryan, Senator Kyl, I want to thank you both so much for joining us today. It should be quite a debate.

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