Bluff Or Denial
Speaking on the Senate floor, Minority leader Mitch McConnell said that the American people voted in enough Republicans to control Congress. That means tax rates should not be raised under any conditions. “The President knows this and he needs to leads us to a compromise”.
Is this a bluff or simply a denial of reality?
Reality is that the House is controlled by the Democrats and the Senate is lead by the Democrats (without a super majority). Reality is also that President Obama ran on a platform of shared sacrifice to reduce the deficit. The President won 320 electoral votes (versus 200 for Romney). The President arguably can say voters chose his approach over that of the Republicans.
Representative Paul Ryan has also said in an interview that he remains absolutely opposed to any increase in tax rates. His position has not changed he says.
Republicans have suggested (being reasonable as they are) that tax code reform could increase tax revenues without increasing rates. While this maybe true, no one has outlined how to make this fair. Think about where the increased revenues might come from.
- Mortgage interest deduction
- State and Local tax deductions
- Property taxes
- Charitable deductions
- Employer provided health care insurance
There are many more deductions, credits, and loopholes but these serve to highlight the point. Each of these represents a far larger percent of discretionary income for the middle class than those earning more than $250,000. In addition, the political process would be expected recognize this unfairness and ease the reform. The net impact will be less increased tax revenue and the need for greater spending reductions.
Of course, Senator McConnell and Representative Ryan know this. So why are they taking these public positions?
The President is proposing a 10 year debt reduction figure of $4 trillion as his target. This is effectively about $400 billion each year.
Publicly the President is asking for $1.6 trillion in new tax revenue and would couple that with spending reductions to get his $4 trillion. Frankly at this point in the debate the President is a little light on the side of spending reductions. He is bordering on blindness to the systemic deficit problem of Medicare, Medicaid, and Social Security. He actually projects about $1 trillion in savings from ending the wars in Iraq and Afghanistan as if there will be not some other war to go fight.
So the nicest dress one can put on McConnell and Ryan’s statements is that they are bluffing. They will bluff until there can be a behind closed doors deal which protects such benefits as capital gains and dividend treatments, inheritance taxes, and a range of special interest loopholes. They will also bluff until they can be assured the President is serious about changes to entitlements.
But danger and risk lurk everywhere.
The President holds the ace of trump. Unless an acceptable deal can be struck, do nothing is more acceptable to the President than the GOP. The Bush tax cuts will expire . The new Congress can then propose ways to lower taxes (read middle class income tax rates and 2% favorites like capital gains, inheritance, etc. The political pressure under this scenario will lie on the backs of Republicans.
So what if McConnell and Ryan are in denial?
Well unless there is a revolt within the GOP and Republicans side with a Democratic sponsored compromise, the year end will come and the Bush tax cuts will expire. Same game. Hmmm.
So I have one question, why aren’t the GOP proposing savings targets for the entitlements instead of insisting upon no tax increases? I wonder whether their posturing is not really part of a much larger bluff to get Democrats identified with entitlement cuts.
That’s what’s nice about math. You don’t have to guess. It either adds up or it doesn’t.