“Fortunately, there may be a middle-ground in which Democrats can raise revenues from higher earners and Republicans can avoid rate increases. There are some relatively simple tax changes that could be enacted for tax year 2013 to raise the same amount of revenue as letting the upper-income tax cuts expire, from only households earning above $250,000, and without increasing current tax rates.”
—Committee for a Responsible Federal Budget, Nov. 15, 2012.
The Paul Revere of the fiscal cliff rode again. Federal Reserve Chairman Ben Bernanke warned in a New York speech last week that Washington needs to “protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law — the so-called “fiscal cliff.” It was Bernanke who, last winter, invented that nickname for tax increases and across-the-board spending cuts that kick in Jan. 1. Failure to pre-empt that blow to Americans and their gross domestic product, he said, risks “the economy toppling back into a recession.”
This is a crisis that doesn’t need to be. We’ve previously suggested two solutions: Democrats and Republicans should cut a deal on deficits, spending and entitlements before Jan. 1, with a side agreement on the nation’s debt limit as the cherry on top. Failing that, they should extend the Jan. 1 deadline, make some obvious spending cuts as a down payment on a Go Big deal, and set firm parameters for that bargain to be concluded early in 2013.
Here’s a third solution, no more difficult than the others. Unless you classify having the humility to stop politicking, reach a bargain and be done with this as difficult.
We wonder why President Barack Obama doesn’t declare victory in a speech — atop a flattened fiscal cliff. Obama has Republicans right where he wants them: offering trillions in future revenue from those high earners he continues to deride.
Obama wants to raise taxes on corporations and wealthy Americans by $1.6 trillion over 10 years. His proposal would raise marginal tax rates on high earners. House Speaker John Boehner and other Republicans have pledged not to raise tax rates. Instead they’ve telegraphed a willingness to reduce deductions and credits — a change easily engineered to hit wealthy households hardest.
Last week the bipartisan Committee for a Responsible Federal Budget essentially confronted Obama with options too good to refuse: If you want to slash deductions and credits to collect as much revenue as you’d get by letting the Bush and Obama tax cuts of 2001, 2003 and 2010 expire, no problem. The math works.
You’ll find the nine-page CRFB report at crfb.org. It offers three options for raising revenue from high earners without raising rates:
c Put a dollar cap on itemized deductions. If Obama insists on $1.6 trillion in new tax revenue, that would mean nearly eliminating those deductions for top earners. But by encouraging Americans to make their financial decisions based on what’s sensible economically rather than on what a loophole-riddled tax code incentivizes, this improves tax policy.
c In a twist on the first option, Congress and Obama could limit the combined value of various deductions, credits and exclusions for high earners.
c Limit the value of certain deductions to the 28-percent bracket, and then phase out that value on a progressive basis as incomes rise. It was Obama who floated the first half of this scheme — limiting the value of deductions — in his budget proposal for the fiscal year that started Oct. 1. Phasing out that value until it drops to zero for incomes of $1 million or more would increase the IRS’ haul.
A two-party agreement to leave tax rates intact, but to raise the same amount of revenue as if they had expired, is an almost too easy solution. Some liberals worry that while limiting deductions would soak the rich, some of the damage would hit middle-income families. Easy: Craft the plan so it doesn’t touch households with incomes below $250,000 for couples, $200,000 for individuals. See how uncomplicated this can be if everyone would stop trying to score points against his or her political foes?
The takeaway is that, as Bloomberg News puts it, “There’s more than one way to skin a fat cat. Theoretically you can reverse-engineer a tax code, raising almost any amount of money you want — and with almost any distribution of the burden you want — without touching the top tax rate. … Why is (Obama) insisting on a tax-rate increase for high-income people? That’s not a rhetorical question. We really don’t get it.”
Neither do we. The president will do this nation a grand favor if he gives that victory speech and relegates the fiscal cliff to fiscal history.