The big news today, of course, is the looming fiscal cliff.
Congress can avoid the mandated sequestration cuts scheduled to kick in on Jan. 2, 2013, if they reach a debt reduction compromise before then.
The problem is that Democrats don’t want to cut entitlement spending (where the big money is) — and Republicans don’t want to raise taxes on anyone.
(The fact that raising taxes on the rich wouldn’t add enough revenue to solve the problem is irrelevant. Democrats believe the rich should pay more taxes. For them, the issue is equality — a notion that the pain should be spread around. And since no deal can be reached without Democrats, arguing about the effectiveness of taxing the rich is essentially moot.)
Democrats also point out that they merely want to return tax levels to the pre-George W. Bush levels. Republicans counter that increasing taxes on job producers would have negative consequences for everyone. What is more, they believe cutting taxes can broaden the base, thus stimulating the economy — and eventually creating additional revenue.
And so, there is gridlock.
It is questionable whether or not any compromise will be reached, but the potential draconian sequestration is a good motivator. So what’s the best chance for a deal?
Sen. Bob Corker’s proposal is perhaps the most likely compromise with the potential to win enough House Republican — and Democratic — votes. Corker’s plan would cap federal deductions at $50,000, reform the federal workforce, and reform Medicare and Social Security (including means testing.)
Conservatives should be ecstatic about the possibility of serious entitlement reform, but they are understandably skeptical the reforms would ever actually take place.
More likely, they believe, spending cuts would remain elusive, while tax hikes would be quickly implemented Still, the instinct to focus on the negative, rather than the positive potential for some significant reforms, is unfortunate.
For such a deal to work, it must be signed in blood.
To be sure, even if we assume a good faith deal would be honored, Corker’s plan would still be controversial.
Some will argue that capping deductions is tantamount to a tax hike. And there very well may be unintended anti-growth consequences to such a move. But free marketers generally believe deductions skew market forces. And Corker’s plan would, by definition, hit top-earners. Lastly, it would allow income tax rates to remain the same.
This is important. During Ronald Reagan’s administration taxes went up 11 times. But as I’ve noted before: “Not only did the top individual income tax rate go from 70 to 28 percent! — but the tax code was also indexed for inflation.”
Not all taxes are equal. And while simply cutting spending (without raising “revenue”) might be the better option, it is not an option which is on the table — not in the real world, at least.
Thus, assuming a compromise must be reached (some argue we shouldn’t resist going over the fiscal cliff) — and that Republicans must agree to additional static revenue — Corker’s plan might be the only viable way to reduce the deficit.