Fiscal cliff: Will GOP put taxes on the table to avoid blow to economy?

Those came packaged with a revenue-neutral corporate tax reform (done by lowering rates while eliminating loopholes) and maintaining current tax rates on capital gains, dividends, and estates. The other half of the equation, spending cuts, totaled some $750 billion under the Toomey plan, with the majority coming from $385 billion in changes to Medicare and $210 billion in lower discretionary spending.

“We did recognize [new tax revenues were] politically necessary because it was absolutely essential for our friends on the other side,” for tax increases to be part of a final package, Toomey said.

Referring back to supercommittee negotiations, Murray called Toomey's 2011 plan “stunning” on the Senate floor Tuesday morning. During the supercommittee, Democrats sketched out their opposition to the Toomey plan. The loopholes he proposes closing and the tax changes he wants to make will have to fall on the middle class in order to generate the trillions in savings necessary for a 20 percent reduction in marginal tax rates, they said.

“While Democrats are fighting for tax cuts for the middle class, Republicans are not only holding them hostage to continue the tax cuts for the rich, they are also scheming ways to cut taxes for the wealthiest Americans even more,” Murray said Tuesday.  

Toomey took exception to this Democratic attack over tax fairness, arguing that his tax proposals, in fact, aim at shielding middle class voters at the expense of wealthier Americans. With Republicans resisting Democratic attempts to pass an extension of the Bush tax cuts on only the first $250,000 in household income, Democrats have hammered the GOP in recent days as protecting the rich at the expense of the middle class.

“We stipulated, right at the very beginning, that in this arrangement, all the net new revenue would have to come from the top two [tax] brackets,” Toomey said.

He argued that even if Democrats didn’t like his specific methods for getting to lower overall tax rates, his guiding principle of avoiding raising taxes on the middle class means he was willing to work on just how to get there.

“I was not religious about exactly what mechanism would occur,” to get to the lower rates, Toomey said.
 
So why would Democrats balk at his plan?
 
First, they would argue that you simply can’t get to Toomey’s numbers without raising taxes on the middle class – the deductions that are most expensive, such as deductions for mortgage interest, also benefit middle-class Americans in droves.

Second, by handling the tax code as a part of a small-bore reduction of long-term federal deficits – Toomey’s overall plan amounts to $1.2 trillion while many economists believe $4 trillion is a minimum amount of debt reduction over the next decade to put the US on stable fiscal footing – could set the stage for deeper spending cuts going forward, because taxes would be effectively settled.

“You have then baked into the tax code a permanent solution that rules out the balance between spending and revenues we’re going to need,” said Bill Galston, a senior fellow at the left-leaning Brookings Institution, in a panel discussion after Toomey’s speech. “If you broaden the base profoundly, which he is suggesting, you lower the rates by 20 percent, that is the new long-term baseline for tax policy and that does not generate, in my judgment, nearly enough revenue.”

Asked how his plan jibes with anti-tax crusader Grover Norquist’s pledge (of which Toomey and nearly all other congressional Republicans are signees) to never raise taxes, Toomey said that he was willing to offer a small tax hike in order to head off a massive one. And by linking his proposal to tax reform which lowers marginal rates, conservatives could argue that they set up a much larger boost to government revenues through economic growth.

“We’re not unaware of the political environment,” Toomey said. “The only way we were going to be able to justify putting revenue on the table would be in the context of pro-growth reform that would offset the damage to come via tax increase and expecting it to come from the top brackets.”

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