Republican Compromise Turned Out To Be Too Good To Be True

Realistically there was one sure sign that we would not see a compromise to avoid the fiscal cliff–it is not the last minute. It appeared there might be some hope of a quick compromise when Representative Tom Cole suggested that Republicans accept Obama’s position of continuing the Bush tax cuts for the middle class while raising rates on the wealthiest tax payers. John Boehner has already shot down that proposal (which doesn’t mean the Republicans might not compromise on this at the last minute).

Republicans, in their usual display of dishonesty on fiscal matters, claim that they are refusing to go along with this in order to protect small business. However, only a tiny percentage of small businesses would be affected by the repeal of the Bush tax cuts. The real motivation is not protecting small business, but protecting the ultra-wealthy and avoiding confrontation with Grover Norquist. While a few Republicans have recently said they would put their country before a pledge to Grover Norquist to never raise taxes, most Republicans fear the political consequences of facing a Tea Party fanatic in their next primary battle.

Some Republicans are looking for a way to raise taxes on the wealthy, knowing that this is necessary, while pretending they are not. Mitt Romney ran on the idea of reducing tax rates and deductions, but there aren’t enough deductions to eliminate for his plan to add up. Recently I heard a really absurd idea floated of raising taxes on the wealthy by keeping the same rates but having the top rate apply to all income. While this might satisfy the desire to raise taxes while telling Tea Party members that they did not support a higher rate, the consequences of this could be a disaster.

Republicans often falsely claim that higher rates will prevent investment in the economy as businessmen will stop working to avoid the  higher rate. This does not actually happen because of how marginal tax rates work. If there is a three percent higher rate on incomes over $500,000, income up to $500,000 will still be charged at the same rates. Paying three percent more only on income over $500,000 would not deter anyone from doing more business which increases income over $500,000. The situation would be completely different if earning over $500,000 meant paying the current top rate on all income. In this case, going over the income threshold would mean that all income would be taxed at a higher rate, not just income over $500,000 and someone earning $500,001 would be paying substantially more in taxes than someone earning $499,999. This would really lead to people having an incentive to make less money if their income would otherwise be over $500,000 (unless it would be substantially more). I doubt this idea will go anywhere.

Hopefully when pushed by a deadline Congress will find a meaningful compromises at the last minute. It is important to avoid the fiscal cliff which will lead to both automatic tax increses and spending cuts. I’m finding some liberals expressing views such as John Cole’s: “Ending the Bush tax cuts and big cuts to defense? Sounds good to me!” Perhaps, but the automatic cuts to Medicare and many domestic programs don’t sound as good.