Larry Kudlow
Republicans are divided. President Obama won't budge. And more and more, it looks like the fiscal-cliff deadline of Dec. 31 will be missed.

It's now clear that Team Obama wants higher tax rates and revenue-raising tax-deduction caps to meet their $1.6 trillion revenue target. Spending cuts and entitlement reforms are vague to nonexistent. In fact, it could be that Obama not only rejects the across-the-board budget sequester, but that he actively seeks to raise spending, not cut it.

I guess it stands to reason that if you puff up his $800 billion revenue increase from last year, and double it to $1.6 trillion this year, the money will be spent. The government will grow larger.

All this should be unacceptable to the GOP.

Sen. Rand Paul, who may have the best idea, told me in an interview this week that he's prepared to pin the tail on Obama's tax-and-spend donkey. "In the Senate," Paul said, "I'm happy not to filibuster it, and I will announce tonight on your show that I will work with Harry Reid to let him pass his big old tax hike, with a simple majority, if that's what Harry Reid wants, because then they will become the party of high taxes, and they can own it."

Other conservatives in the Senate and House agree with Paul. And some House members are talking about a "doomsday" scenario, or what might be called a strategic retreat. Just vote present on the Democrats' tax bill to extend middle-class tax cuts and raise tax rates on income and investment.

A couple dozen other Republicans have signed a bipartisan letter suggesting flexibility on tax rates in return for some kind of entitlement reform -- perhaps moving the top rate from 36 percent to 37 or 38 percent, less than the 39.6 percent Clinton rate, and possibly raising the so-called rich people's threshold to $500,000 or $700,000 from $250,000. But with a vague and un-budging Team Obama, this sounds like a triumph of hope over experience.

The most valiant guy in this process is Speaker John Boehner. He's still trying to cut a deal that would extend all marginal tax rates, including for the upper brackets (he is absolutely determined to prevent an increase in top marginal tax rates, which would really damage the economy), in return for a cap on tax deductions. That would raise roughly $800 billion in revenues, hitting upper-end taxpayers but leaving the middle class alone.

It's like a halfway tax reform, since marginal rates would not be flattened. But it would do less harm to the economy because tax-rate incentives necessary for growth would not be damaged.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.


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