With theÂ â€œfiscal cliffâ€ looming and no â€œgrand bargainâ€ in sight, talk in Washington has turned to a â€œdown paymentâ€ â€” a package of spending cuts and revenue increases that would help us avoid the cliff and give leaders more time to strike a long-term deal. House SpeakerÂ John Boehner says such a mini-deal would serve as â€œa down payment on â€” and a catalyst for â€” major solutions, enacted in 2013, that begin to solve the problem.â€
Unfortunately, the opposite is true. Passing a down payment now could very well doom the chances for major tax and spending reforms next year.
Since Republicans are (for the moment) holding firm to their opposition to raising tax rates, the only way to increase revenues in a down payment is to close loopholes and limit or eliminate deductions â€” something Republicans have expressed a willingness to do as part of a larger deal for tax and spending reform.
As theÂ Wall Street Journal recently pointed out, thereâ€™s a lot more revenue here than most people realize. According to the liberal Tax Policy Center, capping all itemized deductions at $50,000 a year would yield $749â€‰billion in extra revenue over 10 years â€” almost as much as the $823â€‰billion that President Obamaâ€™s plan to raise tax rates on top earners would yield in the same period. Moreover, such a cap would soak the rich first. The top one-fifth of income earners would pay more than 96â€‰percent of the higher taxes.
If you lower the cap on deductions even further to $25,000, thereâ€™s even more revenue to be found â€” an additional $1.286â€‰trillion over 10 years. And a $17,000 cap would raise an additional $1.747â€‰trillion in a decade.
In other words, limiting deductions can buy a lot of tax reform â€” unless, that is, Republican leaders shoot themselves in the foot and give that revenue away in a year-end down payment deal.
Every dollar from limiting deductions that is used for a down payment today is a dollar that cannot be used tomorrow to buy down lower tax rates.
Moreover, using revenues from deductions now would put the GOP in an untenable political position in 2013. During the fall campaign, Democrats accused Republicans of wanting to cut tax rates for the wealthy and pay for it with higher taxes on middle and lower-income Americans. That was a false accusation â€” there is more than enough money to lower tax rates for all Americans and pay for it by cutting deductions for the wealthy. But if Republican leaders use those revenues as part of a down payment, then the GOP have to find some other way to pay for lower rates on high earners. And the only source of revenue left would be tax increases on lower- and middle-income taxpayers.
This means that real tax reform will never happen â€” because the GOP will never lower tax rates on top earners and pay for it with higher taxes on the poor and the middle class. That would be political suicide â€” and it would make the false Democratic charges true.
So what should Republicans do? Resist the call for a down payment, and insist on real tax reform as the price for any new revenue from limiting deductions. If both sides canâ€™t agree on such reforms this year, they can do it next year.Â The Post reports this morning that â€œwith tax rates set to rise automatically in JanuaryÂ .â€‰.â€‰.Â Democrats say they have little incentive before then to cut a deal that falls short of their revenue goals. That means going over the cliff, at least for a short time, remains a possibility, they say.â€
If Obama and the Democrats want to take us over the fiscal cliff, let them lead the way. Once the Bush tax cuts expire, every American will pay higher taxes â€” which means the pressure for tax reform on both sides will be even greater. By contrast, if Republicans give away the revenues from deductions and loopholes today, they will alleviate that pressure and have no revenues left to pay for a simpler, fairer, pro-growth tax code next year.
Message to the GOP: A down payment means the death of tax reform.