After I started this post, I read Stephen F. Hayward's piece in the December 3 issue of National Review, in which he offered House Republicans an idea on how to deal with Taxmageddon:
The House GOP should call the Obama-Krugman bluff--of letting us go over the fiscal cliff on January 1--by passing a sweeping, pro-growth tax reform package right now, and sending it to the Senate, coupled with an announcement that it is not going along with tax increases for anyone unless taxes increase for everyone. The House GOP could even just pass Simpson-Bowles, and rightly say they are passing the plan President Obama's own commission recommended.
I was about to suggest much the same thing, albeit in my customarily garrulous style. Since taxes still seem to be the focal point of the negotiations between President Obama and Speaker Boehner, the House Republican Conference might as well accept that they're not going to convince the president and enough Senate Democrats to agree to a reasonable substitute for what will happen under current law before year's end and pass something like the Tax Reform Act of 1986. Unless they already have something drafted, however, that might not be feasible, so they could just use the Simpson-Bowles plan, but tax filers who itemize should still be allowed to take the full deduction for charitable contributions.
The other part of Hayward's/my idea--that the House GOP should announce that it is not going along with tax increases for anyone unless taxes increase for everyone--may sound like a move wrought with peril. At first blush, it sounds like it would play into the Democratic meme that Republicans are holding middle-class tax cuts "hostage" to protect "the rich," but the GOP has a ready retort, courtesy of the same Democrats who are levelling that charge: "shared sacrifice".
The argument is simple: If President Obama and congressional Democrats are serious about everyone needing to "share" in the "sacrifices" that must be made to get our fiscal house in order, then any deal we reach to reduce the deficit ought to send the message that "we're in this together," and therefore it's only fair that either all wage earners pay higher income taxes, or nobody pays higher income taxes.
Clever Democrats (yes, there are a few) might counter that the "sacrifices" that middle- and lower-income households will have to make should not come in the form of taxes but rather in cuts to entitlements and social welfare programs, but if they made that argument, then Republicans could simply challenge them to name specific programs and services they're willing to cut and at least offer an estimate of how much less they're willing to spend. (I have long believed that Senate Democrats will not be able to provide enough votes for the kind of spending cuts and entitlement reforms that would entice a sufficient number of Republicans to agree to the kind of massive tax hike for which the White House is calling.)
In this vein, Republicans can also usurp the "fairness" issue, which Democrats always seem eager to inject into any debate over tax policy. Obama has demanded that the top individual income tax rates go from 33% and 35% to 36% and 39.6%, respectively, and that all other tax rates should stay the same. Prior to EGTRRA (the first Bush tax cut), the top rate was 39.6% and the lowest income tax rate was 15%. That's an 8:3 ratio between the highest and lowest income tax rates. Since 2003, individual income has been subject to a six-bracket (one more than under Clinton) schedule with a top rate of 35% and a bottom rate of 10%, a 7:2 (or 3.5 to 1) ratio. In other words, the current federal income tax is actually more progressive than it was under Clinton. Obama wants a six-bracket schedule with a top rate of 39.6% and a bottom rate of 10%, the most sharply graduated rate schedule in a generation. Not only should this be troubling to anyone who understands bracket creep, ubt I think most middle- and lower-income Americans would agree that it's not "fair" to lump a household making $300,000 or $400,000 a year into the same tax bracket as Donald Trump and Bill Gates (unless it's a flat tax, which Democrats have long eschewed).
There's another dynamic at work here: The debate over the best way to effect a tax increase--whether to do it by raising tax rates or by limiting/eliminating tax credits and deductions--is fueled in part by the prospective impact of any such change in current tax law on future efforts to reform the tax code. Arch-conservative Sen. Tom Coburn (R-Okla.) recently said that he "would rather see the rates go up than do it the other way because it gives us a greater chance to reform the tax code and broaden the base in the future."
Grover Norquist, president of Americans for Tax Reform who I think has some pledge or something maybe I don't know, had previously explained why he didn't like the concept of "raising revenues" through "closing loopholes," as House Republicans offered to do in their initial proposal to avert the "fiscal cliff". As he told Neil Cavuto:
"They’re not talking about a few deductions and credits. They’re talking about a trillion dollars’ worth of deductions and credits; that’s what -- that's what the other team wants. If you do that [then] you’ve just killed tax reform for a generation. Why? How do you ever get the rates down if you don’t have the deductions and credits? What Obama’s hoping to do is raise taxes, spend the money, kill tax reform for individuals dead all at the same time."
It's something every Republican--in fact, every member of Congress who cares about the future of this country--ought to consider before voting, or even pledging to vote, for any bill designed to raise taxes, whatever the method. "Tax reform," as I and I think most other fiscally-astute Americans think of it, means cleaning up the tax code by lowering income tax rates and reducing and/or eliminating credits and deductions. If there aren't enough credits or deductions to reduce/eliminate, then this endeavor simply becomes a tax cut.
With this in mind, Taxmageddon is starting to look like an awfully appealing option. If they haven't already, then congressional Republicans ought to start hammering out an income tax reform bill along the lines of what Messrs. Simpson and Bowles called for. Post-Taxmaggedon, they'll be able to sell it as a middle-class tax cut that extracts more revenue from wealthy Americans. If the Democrats don't have a comparable counter-offer ready, then they'll be boxed in: oppose the GOP bill and keep taxes high on middle- and lower-income Americans, or sign on to it and effectively concede defeat on the tax policy argument.
What a great way to start Obama's second term.