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A Good Deal Will Raise Tax Rates, Fix Entitlements

Author: Peter R. Orszag, Adjunct Senior Fellow
December 5, 2012
Bloomberg.com

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Although it isn't yet time to panic about the fiscal cliff, negotiations so far aren't exactly going well. The Republicans are committing themselves to an unsustainable principle of no marginal tax-rate increases whatsoever. And the Democrats are failing to seize the moment to make progressive reforms to Medicare and Social Security.

There's still time to come to an agreement to prevent the more than $600 billion in federal spending cuts and tax increases scheduled to take effect in January while also raising the debt limit, but both sides will need to get out of the boxes they have put themselves in.

Let's start with the Republicans. Their adamant opposition to an increase in marginal tax rates for anyone, anywhere, has two problems. First, as I explained in last week's column, raising huge amounts of revenue by reducing tax expenditures gets harder to do as the details become clear. The only practical way to hit a reasonable revenue target is to have some increase in marginal rates.

The second problem is that hard-and-fast principles can look increasingly ridiculous when taken, by opponents, to their logical extremes. Imagine some clever but Machiavellian Democrat (Senator Charles Schumer of New York comes to mind) proposing that the top marginal tax rate be increased to 35.5 percent, from 35 percent, for people with income above $5 million. Would the Republicans really blow up a deal over an almost undetectable increase on a tiny number of extremely high-income taxpayers? That would be political suicide. On the other hand, if the Republicans accept this increase, then they don't have a principle anymore.

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