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One shot on taxes: Don’t blow it, Democrats

By Ezra Klein,

There are now two sides in the American tax debate: the Republican Party, which refuses to have a serious conversation about taxes, and the Democratic Party, which . . . refuses to have a serious conversation about taxes.

Let’s start here: We cannot fund anything close to the government’s commitments if we don’t raise taxes, or if we let only the Bush tax cuts for income over $250,000 expire. And that’s true even if we make deep cuts across all categories of federal spending.

In the past year, there have been two major attempts to develop a bipartisan deficit-reduction package: one by the president’s fiscal commission, led by Alan Simpson and Erskine Bowles, and one by the Bipartisan Policy Center’s commission, led by Alice Rivlin and Pete Domenici. Rivlin, the first director of the Congressional Budget Office and one of the most respected fiscal hawks in Washington, had a particularly good vantage point on the two processes: She co-chaired one commission and served on the other. And she says Republicans and Democrats on both panels came to the same realization.

“We always started by asking how to slow the growth of entitlements, because that’s what’s driving the budget deficits,” she says. “But then we would find there’s nothing you can do that gets you much money in the near term. Then we would go after discretionary spending, and cap or freeze that. But after we did all that, we would realize we hadn’t closed the gap. This happened on both commissions. And that’s when everyone would realize you need more revenue and turn to improving the tax code.”

The proof is in the plans. The Simpson-Bowles commission called for almost $2 trillion in new revenue over the next 10 years. It got $800 billion of that from letting the Bush tax cuts for the rich expire, and the rest from clearing loopholes and spending programs out of the tax code. That plan won the support of Republican Sens. Tom Coburn (Okla.), Judd Gregg (N.H.) and Mike Crapo (Idaho) — three conservatives in good standing.

The Rivlin-Domenici commission’s plan would have raised even more money by adding a value-added tax on top of its tax reform proposal, and it won the backing of the panel’s Republicans, who included Bob Dole’s former chief of staff and Bill Frist’s former budget director.

The debt-ceiling deal simply proves the point. Let’s say the spending cuts go exactly as the Republicans hope: We cut $900 billion now and $1.5 trillion later. That’s more cuts than the White House says it would ever agree to, but ignore that for a moment. Now let’s say the tax side goes according to the White House’s plan: Most of the Bush tax cuts are extended, but the break for income of more than $250,000 a year expires. Are we done?

I asked Jim Horney of the Center on Budget and Policy Priorities to run the numbers. In 2021, that scenario would leave the debt above 75 percent of GDP — and growing. That’s well above the 60 percent of GDP most deficit hawks think we should shoot for, and it doesn’t leave us at all prepared to deal with costs related to the retiring baby boomers.

Perhaps this wouldn’t matter if the Republicans were more reasonable. But they’re not. They’ve made perfectly clear that they will fight to the last man, woman and child to keep taxes at historic lows. They will deny that tax cuts cost money and that deficit deals should include revenue. They will risk defaults and shutdowns, gridlock and unpopularity, all to make sure there’s not a single corporate jet owner in this great land who has to pay a single extra dollar in taxes.

Democrats will have exactly one chance to overcome the GOP’s resistance to tax revenue. Next year, the Bush tax cuts expire. If Congress does nothing, we revert to Clinton-era tax rates for everyone, and the federal coffers fill with $3.6 trillion in additional revenue over the next 10 years — enough to stabilize deficits. This is a rare opportunity in which it’s Democrats who hold the hostage and Republicans who have to compromise.

Tell this to the folks at the White House, and they’ll say that this is like pointing a gun at their own head and threatening to pull the trigger. Raising taxes on anyone but the rich is unpopular, and a large tax increase is not what the economy needs right now. They’re right on both counts. But in this case, two rights make a wrong.

To govern responsibly, Democrats cannot simply raise taxes on the rich and call it a day. That’s a world in which Republicans continuously force crises, refuse taxes, and extract deeper and deeper cuts. Already, Senate Minority Leader Mitch McConnell (R-Ky.) has called the GOP’s debt-ceiling brinksmanship “a new template” and promised that “in the future, any president, this one or another one, when they request us to raise the debt ceiling, it will not be clean anymore.”

But Democrats have another option. Just as Republicans planted a trigger for 2011 that ensures spending cuts, Democrats should use the Bush tax cuts as a trigger in 2012 to force revenues. Which is not to say they should campaign for raising taxes. They should campaign against an outdated, inefficient, unfair tax code as well as the Washington way of leaving hard problems for somebody else to handle.

The White House should announce that it won’t extend any of the Bush tax cuts and will instead insist on a Gang-of-Six-esque plan that cleans the code, lowers rates for everyone, and raises $2 trillion or more in revenue. If the GOP refuses, the tax cuts will expire, our revenue problems will be solved, and Republicans will suddenly find themselves much more interested in tax reform. Sometimes, to govern like a Democrat, you need to negotiate like a Republican.

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