WASHINGTON, D.C. - U.S. Sen. Pat Toomey (R-Pa.) questioned Dr. Kevin Hassett, director of economic policy studies and a senior fellow at the American Enterprise Institute, about the fiscal cliff at today's Joint Economic Committee hearing.

A full transcript of the senator's questioning is below:

SEN. TOOMEY: Thank you to my colleague from Pennsylvania, Senator Casey, and thanks for convening this hearing.

First, I'd like Dr. Hassett to see if you agree with the way I'm looking at -- the president's proposal, the most recent proposal had some specifics and in other areas was very unclear exactly what he's -- what he's getting at. But I think the -- it is clear that there's a headline tax increase that he wants of $1.6 trillion and I think what the administration would describe as $600 billion in spending reductions.

But when you drill down, it looks to me like there's much less even than that in spending restraint. For instance, it looks like $200 billion of what they put under the $600 billion heading is, in fact, revenue, fees and various other forms of revenue. That's not spending restraint at all.

There is a deferral of the sequestration. I'm not sure it's clear how long that deferral is meant to be, but if it's for one year, that's $100 billion, and I would think it's intended to be at least that. Then there's additional stimulus spending and various other forms of spending, the doc fix and other things, that add up to at least $100 billion. So that's $400 billion, anyway, that you should legitimately, I think, deduct from the headline $600 billion, if you wanted to arrive at what might be a legitimate spending restraint.

So then if you go back and you say, well, OK, it's $1.6 trillion in new revenue, that -- they certainly want that, and maybe we've got $200 billion in spending restraint, is it fair to say that this is about an 8 to 1 ratio?

HASSETT: That's about right. I think that...

SEN. TOOMEY: Where revenue -- tax increases are eight times the spending restraint?

HASSETT: That's right, even in the specific proposal, but it's sort of part of -- there's some recidivism here in the sense that -- that I think that spending reductions have systematically been overstated in recent years by the president and often, you know, double-counting the Iraq war savings...

SEN. TOOMEY: Right.

HASSETT: ... and things like that. But I think there's -- it appears to me that there's a heck of a lot of tax increase and almost no spending reductions.

SEN. TOOMEY: And, in fact, you know, spending programs that you launch, they surely happened. That money gets spent. Promises of future savings, much less so. And when -- so when the president talks about new stimulus spending, if he had his way, I'm quite sure that would happen. I'm not sure that the savings would materialize at all.

What I'm suggesting is, in reality, the president's proposal is almost entirely new taxes and virtually nothing that's specific, anyway, on the spending restraint. And your research suggests, if I understood it correctly, that the most successful forms of consolidation are those in which the ratio is almost the reciprocal of that.

HASSETT: Exactly.

SEN. TOOMEY: Is that right?

HASSETT: Yeah. In fact, I can say, you know, with absolute certainty that a consolidation that has the shape that the president's proposed would fail. And the way to think about it is this, too, that in the economy that we have now, with the highest corporate tax in the developed world, very, you know, high -- high individual income tax rates that are going up and taxes on dividends may be skyrocketing almost to 45 percent, in that kind of a world, it's impossible to envision generating the kind of healthy economic growth that would ever make us willing to have the spending cuts that we promised to do two years from now. Two years from now, GDP growth will be 1.5 percent. And we'll be saying, oh, we can't afford to cut government spending, because it'll throw us into recession.

SEN. TOOMEY: Right. So that kind of brings me to the next issue I'd like to discuss. To get to the president's tax increase package that he's looking for, he's calling -- well, he's been very clear about it. He's calling for higher marginal tax rates and, in addition, a reduction in the value of deductions and other expenditures, higher taxes on capital gains, higher taxes on dividends.

The way I count this up, if you include the Pease limitation, the top marginal tax rates for some would be between 41 percent and 45 percent, and that's just the federal level. We have states, of course, that have varying income tax rates, from zero to double-digit levels, meaning that some Americans would be paying more than half of their income, their marginal income tax rate would exceed 50 percent.

If the president got all the tax increase that we wants in this form that he's asked for, is it likely that that could precipitate a recession?

HASSETT: It's not only likely, that it would certainly do so. In fact, the dividend tax increase alone is positively cataclysmic. If we go from a 15 percent dividend tax to an almost 45 percent, once you're all in with the phase-out of itemized deductions and so on, then -- I mean, that's ridiculously bad news for equity markets, and it's something that we saw on the other side. There's a very large academic literature, including a few papers that I've written, as well, that looked at -- at how firms responded to the dividend tax reductions, and there was a lot of positive movement in things like equity prices.

And so -- so I think that, as a package, you know, it -- and, you know, I guess there's a question of how negotiations work, and maybe you want to start negotiation with an extreme position, but I just can't imagine anyone looking at that proposal and arguing that it wouldn't throw us into a recession.

SEN. TOOMEY: You know, there's another approach that you can take in negotiations. And in my experience, it's been a more successful one. Rather than taking an extreme that's very harmful and that you know the other side can't accept, what you do is you actually look for areas where the other side could meet you halfway, and you say, for instance, if -- because of the political imperative that's been created here, if revenue has to be part of this -- I don't think that that's economically or fiscally necessary or optimal, but if it's politically necessary, shouldn't it at least be generated in the way that does the least economic harm? And in your view, would you do less economic damage by generating revenue through reducing the value of expenditures than raising marginal rates?

HASSETT: Yeah, you do -- you know, and if you phase it in far in advice -- so, for example, changing my Social Security benefits when I retire now, but doing so absolutely credibly, then you would have a positive growth effect right now from a spending -- a commitment to a spending cut, because you would give clarity to all the people that are worried about the future of America.

SEN. TOOMEY: Yeah, I see my time is expired. Thanks, Mr. Chairman.

SEN. CASEY: Thank you, Senator Toomey.