Don’t blame Boehner for Plan B fiasco

Larry Kudlow Senior Contributor, CNBC
Font Size:

When you lose an election, you get frustrated. When you’re sitting in a subpar 2 percent economy and are faced with tax hikes rather than marginal rate reductions, you get even more frustrated. And when you’re staring at $47 trillion in spending over the next 10 years, and $8.6 trillion in deficits, your frustration levels climb even higher.

These are among the frustrations that led a number of House Republicans to pull back from Speaker John Boehner’s so-called Plan B. Nobody looked good on the Republican side when Thursday night’s vote fell through. But you have to understand their frustrations. Losing an election is no fun.

I don’t blame John Boehner. Plan B is the best compromise currently available. Or put another way, it’s the least bad option out there. It was even backed by Paul Ryan and Grover Norquist.

Plan B would have allowed the top income tax rate to revert to 39.6%, but only for incomes of $1 million and up. All the other Bush income tax rates would have remained the same. Capital gains and dividend tax rates would rise from 15 percent to only 20 percent. The estate tax would go to 35 percent, not 55 percent. And everything would be made permanent, unless and until real flat-tax reform took place.

No, there were not enough spending cuts in Plan B. But a couple hundred billion in spending cuts were inserted at the last minute.

Boehner figured that if the House passed Plan B, it could put pressure on President Obama and the Senate Democrats to raise taxes less and cut spending more. A couple dozen House conservatives wouldn’t buy it. I understand that. But I still think Boehner was on a noble mission in very difficult post-election circumstances.

The demise of Plan B almost certainly will prolong the fiscal-cliff negotiations, which will spill over into the new year. But I still believe this is a game where all the players are bluffing. Washington lawmakers will not risk a recession by allowing all the Bush tax cuts to expire — thus pulling $500 billion out of the economy — and rolling back important economic-growth incentives. I just don’t believe it.

And if the negotiations go well into January, the Treasury Department and the IRS can stall any changes in withholding rates. Then a deal can be worked out that will extend the middle-class tax cuts up to a threshold of $250,000 to $400,000. Patching the AMT will be thrown in there, too. So will the so-called “doc-reimbursement fix,” some kind of unemployment insurance, and some small leftover sequester spending cuts.

This will make no dent in our spending, borrowing, and debt problems. But at least it will avert a recession.

For the Republicans, the sooner they can get out from under this mess, and move on to tax, spending, and entitlement reform, the better off they’ll be. And for heaven’s sake, let’s finally cut the corporate tax rate. But for now, it’s time for a strategic retreat, as the economy teeters over the cliff.

One final thought: In a post-January 1 scenario, after Washington has temporarily gone over the cliff and all the tax rates have gone up, any bill that restores the Bush tax cuts actually becomes a bill to cut tax rates, not raise them or stop them from rising. That’s a much better dynamic for the GOP’s strategic retreat.

But alas, real reforms for taxes, spending, and entitlements — and real fiscal solvency and real economic-growth prosperity — still seem very far away.

Larry Kudlow is the host of CNBC’s “The Kudlow Report.”