How Democrats Can Get What They Want: Agree With Republicans

Posted: Dec 03, 2012 8:34 PM
Democrats have said that that their priorities when it comes to a fiscal cliff deal are to raise more tax revenue and make the tax code more progressive.

Which is why it's odd to see them drawing a line in the sand on raising tax rates.

Raising marginal income tax rates is one of the most economically harmful ways to raise taxes. (The only provisions of the tax code that are more damaging are the corporate income tax and taxes on savings and investments.) Perhaps the only explanation is that Democrats don't actually care about how to efficiently accomplish their goals - only that they enact some sort of soak-the-rich policy that makes it look like they've "won."

Speaker John Boehner and Minority Leader Mitch McConnell have repeatedly expressed their preference for eliminating tax deductions rather than raising tax rates as a means of raising government tax revenues. While they and other elected Republicans haven't exactly been precise with plans, there's an important and politically-feasible one that was floated by Mitt Romney during the campaign: a deductions cap.

The IRS could cap tax deductions at $50,000 per family per year, which would overwhelmingly be reached by high income-earners. This would raise significantly more revenue than hiking the top tax rates:

There's a lot of money to be made from this particular cat's skin. According to the Tax Policy Center, capping deductions at $50,000 per household would raise an extra $749 billion over a decade. That's about $300 billion more than the government would get from raising the top two income tax rates, as President Obama has proposed.

And, as the Congressional Budget Office has pointed out, raising tax revenue by limiting deductions rather than by hiking tax rates is definitely the way to go:

Increases in marginal tax rates on labor would tend to reduce the amount of labor supplied to the economy, whereas increases in revenues of a similar magnitude from broadening the tax base would probably have a smaller negative impact or even a positive impact in the supply in labor.

So why the Democratic commitment to raising rates instead of agreeing to a deductions cap? Democrats are wed to a pure symbolism of raising tax rates. It hurts the economy, it's inefficient, and it could destroy up to 300,000 jobs over the next two years, but at the end of the day, Democrats just want rates higher.

This is not to say that taxes are the most important piece of the deficit reduction puzzle. They're not. Long-term spending on health entitlement programs is by far the largest driver of future deficits and debt. This is just to point out the seeming economic ignorance and class warfare the Democrats are demonstrating.