First, a bit of history. The 2001 and 2003 changes to the tax code reduced marginal rates for all taxpayers as well as the rates for capital gains, dividends and the death tax. For technical reasons, all of these provisions expire at the end of next year — meaning that if Congress does not act, Americans will face the largest tax increase in our history.
This prospect has put a wet blanket over job creation and economic recovery. It would be the wrong medicine for our ailing economy. As President Obama has famously said, “You don’t raise taxes in a recession.” Partially to avoid this result, but also to try to meet the Democrats partway — given their absolute insistence on big, new tax increases — Republicans offered a proposal that would have both reformed the current code and produced significant new tax revenue.
Senate Democratic Whip Dick Durbin rightly called the Toomey plan a “breakthrough” in the negotiations; indeed, it was the only truly new idea offered during this process.
The essence of the plan was to dramatically reduce the deductions and credits wealthier taxpayers can claim to reduce their tax liability. That would generate enough revenue to both permanently reduce marginal rates for all taxpayers and provide more than $250 billion for deficit reduction. Added to other receipts, taxes and fees, the Republican plan amounted to more than $500 billion in deficit reduction revenue and $900 billion in spending reductions. We believe this lowering of the rates and broadening of the tax base would have spurred economic growth, created jobs and, in the process, generated billions more in revenue from growth in the economy.
Now, here’s the key: None of this can happen if the current law’s automatic tax increases occur on Jan. 1, 2013. We can’t both reform the code as Republicans propose and undo it all 12 months later.
Democrats made a point of saying that they would accept the new tax revenue in the plan but that they still also wanted the 2013 tax increase — which, of course, would negate the benefits of the proposal.
Why do Republicans believe our proposal is preferable to the automatic 2013 rate increases? Apart from the fact that our economy could not withstand the almost $4 trillion tax increase, it would directly and adversely affect small-business investment decisions. Business decisions are highly sensitive to the rates of the capital gains, dividends and death tax, as well as marginal tax rates. That’s why Republicans would leave them alone and raise revenue instead by limiting personal itemized deductions and credits that have much less impact on investment decisions by small-business owners.
The point is, it matters both how and how much the government takes from taxpayers.
So it was not some political attachment to the Bush tax cuts that stymied committee success but, rather, the refusal of the committee’s Democrats to acknowledge the inconsistency in claiming to accept the amount and way the Republican plan would raise tax revenue while insisting that the 2013 tax increases (at least those affecting investment decisions) must also occur.
At no time in the negotiations did the Democratic committee members drop their insistence that, one way or the other, any deal had to include a trillion dollars in new taxes. Republicans believe that would kill job creation and economic recovery. In the long run, a strong economy producing more wealth (and, therefore, more tax revenue) is how we will both reduce the deficit and regain the prosperity that all Americans deserve.
The writers are the Republican members of the Joint Select Committee on Deficit Reduction. Jon Kyl is a senator from Arizona. Rob Portman is a senator from Ohio. Pat Toomey is a senator from Pennsylvania. Jeb Hensarling is a representative from Texas. Fred Upton and Dave Camp are representatives from Michigan.