I spent the whole day yesterday arguing fiscal cliff issues with conservatives, specifically, whether new revenues should be raised through higher tax rates–expiration of the upper-income Bush tax cuts–or by lowering rates and broadening the base. Here’s my field report (btw, my wife suggested raising the top rates and broadening the base–first time I’ve heard that one):
–It is big–HUGE–for conservatives that the President has not mentioned higher rates since Tuesday, including in his comments yesterday. His spokesperson did say that he’d veto a bill that fully extended all the cuts, but the White House has been careful not to come down on one side or the other of the rates/base question. His opposition is quite emboldened by this.
My view: I’m not saying he should say “my way or highway” but he should clearly open negotiations with them next week with the plan he ran on: rate expiration on households above $250K (the top 2%).
–I encountered two camps of Republicans on this: dynamic scorers, full stop, and partial dynamic scorers. The former are those who say: just lower the tax rates and watch the revenues flow in…problem painlessly solved! They’re very, very wrong, and thankfully most of the folks I argued with yesterday are in latter camp. In fact, this is their concession from the election: the recognition that we cannot achieve a sustainable budget path on spending cuts and dynamic scoring fairy dust alone.
–Some, though not Leader Boehner yet, are starting to make sounds about taking unearned income, like capital gains and dividends, which current enjoy favorable treatment in the tax code, off the base-broadening table. That’s exactly what the President and his negotiating team should suspect: the bait and switch of the tax reform trap–they lure you in with broader base rhetoric but once it’s over, you’re left with just the lower rates. That’s why I suspect this tactic leaves R’s with a mini-Romney math problem.
–They are not constrained by meeting the $1 trillion in revenues over 10 years we’d get from upper-income rate sunsets. Sen. John Kyl, for example, on the Larry Kudlow show, cited Sen. Toomey’s budget plan as a great place to start. That raises $250bn in new revenues, one-quarter of the top rate sunset amount.
–The President was absolutely right to begin his comments with the imperative of any deal protecting and strengthening the current recovery through additional jobs measures. My experience from yesterday: he will not find willing partners on this among Republicans.
—Yesterday, CNBC anchor Brian Sullivan made what I thought was an intuitive point that’s under-appreciated: it would be a lot simpler and cleaner to just raise the top rates than to have a battle of which loopholes to close. The point above about taking unearned income off the table underscores Sullivan point. Me, I’m a huge advocate for simplicity in the code. Once they start moving around income definitions, watch out.
The counter-argument here, which I appreciate, says: OK, then let’s just cap deductions. That’s pretty simple, clean, and progressive, but probably doesn’t yield the revenue we need without breaking the $250K barrier. There may well come a time to break that barrier. But this is not that time.