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Charles Krauthammer: The 50 percent solution

BY CHARLES KRAUTHAMMER Published: March 22, 2013
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The proposition that entitlement curbs are the key to maintaining national solvency is widely accepted, though not by many congressional Democrats. President Obama, however, has endorsed it on various occasions. And he could make it happen.

If he wants. I remain skeptical that he does. But national solvency is important enough to test this proposition at least once more. The obstacle is Obama's current position that entitlement cuts must be “balanced” with new revenue from closing loopholes.

Republicans are adamantly opposed. No more revenues, Mr. President. You got your tax hike on Jan. 1.

Is there a solution? Yes: tax reform with a twist.

The problem begins with definitions. By tax reform, Obama means eliminating deductions, exclusions, credits of various kinds with all the money going to the Treasury.

That's radically new. The historic 1986 Reagan-O'Neill tax reform closed loopholes with no extra money going to the Treasury. The new revenue went directly back to the citizenry in the form of lower tax rates.

This is called revenue neutrality. The idea is that tax reform is a way not to fatten the Treasury but to clean the tax code. It means eliminating special-interest favors and behavior-altering deductions that create waste and inefficiency by inducing tax-preferred rather than market-oriented economic activity. And it introduces fairness by removing breaks and payoffs for which only the rich can afford to lobby.

As a final bonus, tax reform's lower rates spur economic growth. A unique win-win-win: efficiency, fairness, growth.

Obama's own Simpson-Bowles deficit-reduction commission offered a variant. First, it identified an astonishing $1.1 trillion per year of these “tax expenditures.” That's more than $11 trillion in a decade. In one scenario, it knocked them all out and lowered marginal tax rates to just three brackets of 8 percent, 14 percent and 23 percent.

But here's the twist. Using the full $1.1 trillion annually of newly redeemed “loophole” revenue, Simpson-Bowles could have dropped the rates a bit below 23 percent. But instead it left some of that money in the Treasury, an average of almost $100 billion a year, or about $1 trillion over a decade. It was a reasonable compromise, so reasonable that even the Senate's most fierce spending hawk, commission member Tom Coburn, signed on.

Now, Simpson-Bowles is not on the table but it could be a model. Obama's “tax reform” would send 100 percent of the revenue to the Treasury. Reagan-O'Neill sent zero percent. Simpson-Bowles fell somewhere in between. So should any grand compromise.

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