Charles Krauthammer: The 50 percent solution

BY CHARLES KRAUTHAMMER Published: March 22, 2013
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Before deciding exactly where to locate that compromise, however, we have to decide which deductions to cut, yielding how much revenue. The bad news is that, given all the lobbying and haggling this would occasion, it could take years to work out. The good news is the formula proposed by Harvard economist Martin Feldstein. Before even picking and choosing which deductions should remain permissible, it simply allows no one to reduce his tax bill by more than 2 percent by using any or all of the deductions and loopholes in the current tax code (except charitable contributions).

There should, of course, be separate negotiations over which of the hundreds, thousands, of loopholes/deductions should be tossed out as corrupt or counterproductive rent-seeking. But the 2 percent ceiling means that we don't have to wait until full tax reform — because the Feldstein formula significantly and immediately reduces the impact of all the loopholes.

Feldstein calculates that his tax reform would yield $2.1 trillion in new revenue over a decade. Now we can cut the pie. Obama wants the government to keep it all. The GOP wants to give it all back to reduce tax rates. Let's be Solomonic. Divide the revenue in half — 50 percent to the Treasury for reducing debt, 50 percent to the citizenry for reducing rates.

That's roughly $1 trillion each. Everybody gets something. Republicans unexpectedly get a rate cut, minor but symbolic after having had to swallow the fiscal cliff rate hike. The country gets the first significant tax reform in a quarter century. Obama gets $1 trillion worth of “balance,” his price for real entitlement reform. And if he turns out to be serious about that, we get the Holy Grail — tax and entitlement reform all at once.

Which means a deal that manages to simultaneously promote efficiency, fairness, growth, debt reduction and a return to national solvency. In other words, the best deal since the Louisiana Purchase.

Charles Krauthammer's email address is letters@charleskrauthammer.com.

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