Wednesday, November 14, 2012

Obama's reply to the Republicans on closing income tax "loopholes"

In response to Republicans' suggestion that we get increased tax revenues by letting the Bush tax cuts expire as to the marginal rate at the top - restoring the pre-2001 top rate of 39.6 percent that has always been scheduled to happen within the revenue estimators' official budget window - President Obama is quoted as follows by the Huffington Post:

"But when it comes to the top 2 percent, what I'm not going to do is to extend further a tax cut for folks who don't need it, which would cost close to a trillion dollars. And it's very difficult to see how you make up that trillion dollars, if we're serious about deficit reduction, just by closing loopholes and deductions ...

"The math tends not to work....

"If there was one thing that everybody understood, that was a big difference between myself and Mr. Romney, it was when it comes to how we reduce our deficit, I argued for a balanced, responsible approach -- and part of that included making sure that the wealthiest Americans pay a little bit more ... By the way, more voters agreed with me on this issue than voted for me.

"The only question now is, are we going to hold the middle class hostage in order to go ahead and let that happen?"

There are several things going on here.  One is Obama's vehement (at least for now) rejection of the "hostage strategy" that the Congressional Republicans employed so frequently, and often so successfully, during his first term.

But another is his position that restoring the 39.6 percent top rate is not a subject of bargaining, but simply something that is going to happen regardless.  Obviously, present law favors him on this, since all of the Bush tax cuts will expire on January 1 if Congress simply does nothing.  Only a successful hostage strategy could compel him to accept restoration of the higher top rate as the price of extending lower rates for everyone else, which is a result that both sides favor as a standalone proposition.

But a further interesting angle here arises from the possibility that the Republicans might be more eager than the Democrats to reduce tax preferences, even if targeted at the top end, that both sides increasingly conceptualize as "spending."  Then the Republicans' call for capping or restricting tax preferences might end up being, not a substitute for raising the top rate, but a concession from the Democrats (against the background of having already restored the 39.6 percent top rate) in exchange for separate consideration, such as something on the entitlements side.

This still seems a bit fanciful - Republicans demanding higher income tax revenues (as officially measured) that come mainly from the wealthy, in exchange for "spending" cuts elsewhere in the budget.  But if sanity prevails on the Republican side (and there have indeed been some hopeful indications, in these admittedly still-early days), then there would at least be a discernible logic to their negotiating this way.

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