Wednesday, July 20, 2011

Stand There And Do Nothing

The Gang of Six is out with its proposal or, rather, a framework for a proposal. It would cut the deficit by approximately $4 trillion over twelve years with 76% of that coming from spending reductions and 24% from tax increases, most of which would hit primarily the middle class. President Obama, of course, signaled general support for its principles.

In what seems so long ago, Senate Republican leader Mitch McConnell proposed a "clean" debt bill, which would have saved the nation and the economy from devastating spending cuts, though it would have required the President to request thrice of Congress that it raise the debt ceiling. That was, however, unacceptable to the far right of the House GOP caucus and to Barack Obama, demonstrating once again that politics makes strange bedfellows. Or maybe not.

President Obama is itching for that Grand Bargain so that he can do something really, really BIG. He has been pushing an agreement to cut spending and eliminate a few tax loopholes, which he probably realizes would be transitory. But Republican members of Congress, nearly all of whom have signed the Americans for Tax Reform Taxpayer Protection Pledge, are cool to slashing spending because of the small tax increase (for corporations) which would be part of the package.

So the President is doing whatever he can to sweeten the package for those Republicans, frightened that any vote for anything vaguely resembling anything like a tax increase would bring down upon them the wrath of ATR's Grover Norquist, and a primary challenge.

But there appears to be a way out for a President who recognizes the need for revenue increases and is obsessed with cutting the national debt. The Washington Post editorialized Wednesday

With a handful of exceptions, every Republican member of Congress has signed a pledge against increasing taxes. Would allowing the Bush tax cuts to expire as scheduled in 2012 violate this vow? We posed this question to Grover Norquist,its author and enforcer, and his answer was both surprising and encouraging: No.

In other words, according to Mr. Norquist’s interpretation of the Americans for Tax Reform pledge, lawmakers have the technical leeway to bring in as much as $4 trillion in new tax revenue — the cost of extending President George W. Bush’s tax cuts for another decade — without being accused of breaking their promise. “Not continuing a tax cut is not technically a tax increase,” Mr. Norquist told us. So it doesn’t violate the pledge? “We wouldn’t hold it that way,” he said.

As the chart (from the Center for Budget and Policy Priorities via below indicates, repealing the Bush-era tax cuts, extended six months ago by the Obama-GOP coalition, would dramatically reduce the national debt.

The deficit as a percentage of GDP would drop dramatically if these cuts expire on schedule in 2012, as the chart (from CBPP) below shows.

Expiration of the tax rates could spare the economy spending cuts which would further reduce consumer demand which, The Wall Street Journal has found, most economists believe is the key to persuading companies to resume hiring. It would also, however, reduce pressure for reducing entitlements, which the Gang of Six favors. And that would be very unpopular with the Obama-GOP axis which now dominates the nation's politics.

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