Here's the Way to a Deal!
Eric Cantor’s recent declaration that Republicans will look at “loopholes”is a step in the right direction but Cantor is wrong to insist that any loophole closing be met with an equal cut in taxes. In fact if he bends just a little on this point, he could easily come up with something that looks a lot like a Republican victory.
It’s pretty simple. As I’ve argued before, most of the trillion dollars in “revenue expenditures” scored by the Congressional budget Office comes from big-ticket items that serve purposes very similar to marginal rate cuts. Since almost everyone is going to pay state and local taxes, incur medical expenses, and (at some point) have a home mortgage, its important to insist that very broad changes to these deductions for these things be offset with similarly-sized cuts somewhere else.
Far more tax expenditures—all of them far less consequential than the ones noted above—are really just spending by another name. Credits and benefits for ethanol producers, blind people, wind farms, the working poor and others simply redirect spending in almost the same way as would happen in Congress simply appropriated the money to these purposes. In fact, they may be less efficient at accomplishing their stated public goals than spending, since many go to people that might have done the same thing without the credit.
A few of make a lot of sense (the Earned Income Tax Credit is a huge boost to the working poor) but most of them are special pleadings from one group or another. Only a handful of these handouts are defensible at all in the current fiscal climate and getting rid of the great majority of them would have no impact on the overwhelming majority of the population or the great bulk of businesses. Ideally, they should be subject to a “zero base” policy similar to the procedure used in some states. The budget process should start with the assumption that none of them should exist and then they should be justified only if policymakers decide that an activity is a legitimate government role and that the tax expenditure in question is the best means to accomplish that goal.
So here’s how Republicans can get a victory for themselves Democrats would probably have to accept: agree to raise some revenue by eliminating indefensible tax breaks for things like ethanol, privately owned cars, new air conditioning systems, second homes (a change in the mortgage interest deduction, yes, but not a broad one), while also cutting marginal tax rates for many by playing with some of the bigger features of the tax code in a revenue neutral way. If Tea Party Republicans really want to prove their libertarian bona fides, they should eliminate the state and local tax deduction wholesale (it subsidizes high-tax states and encourages the growth of government) and devote some or all of the revenue gains to cutting marginal rates on many middle-income people. If spending cuts were also part of the package (and, at least rhetorically, both sides support them), Republicans could deliver almost everything they promised last November.
The end result could be a real Republican victory: no default, real spending cuts, real deficit reduction, and lower marginal tax rates. This would be a very good package to take to the voters in November of 2012. And Republicans could take credit for almost all of it.