Fiscal Cliff? — A Paleocon and a Neocon Call For Similar Strategies

News this afternoon is that Speaker Boehner has sent a “fiscal cliff” counter offer to Obama.  According to a report by Chris Frates in the National Journal  it is based on a proposal Erskine Bowles made to the super committee last year.

The article further states that Boehner’s proposal today “calls for $800 billion in new revenue and $1.4 trillion in savings including $600 billion in changes to health programs like Medicare and Medicaid; $300 billion in cuts to mandatory programs, $200 billion raised by changing how the federal government uses the consumer price index to set salaries and benefits and $300 billion in further discretionary spending cuts.”

We presume the “new revenue” comes from elimination of various tax deductions and not rate increases. We also observe that while eliminating a tax deduction is not a rate increase it may be an effective out of pocket increase for those affected.  We will withhold judgment pending more specification as to whether the deductions were more isolated special interest favors or of a nature relied on by business and industry in general. Certainly seriously curtailing spending is good.

An article by Pat Buchanan suggested a more compelling process . . . as it provides a device to get over the terror that Republican leadership has  about being painted as obstructionist protectors of “tax breaks for the rich.”  Never mind their collective failure to let such a positioning come to be, it is what it is.

What should Speaker John Boehner do according to Buchanan?

Tell the president politely that America’s problem is not that we are taxed too little but that we spend too much — and the GOP will not sign on either to tax rate or tax revenue increases. For Republicans believe that would further injure the economy — especially an economy limping along at between 1 and 2 percent growth.

Then Boehner should depart the White House, go back up to the Hill and urge his Republican caucus to do two things.

Pass an extension of the Social Security payroll tax cut and block its automatic rise from 4.2 percent of wages to 6.2 percent. To raise that tax now and scoop off the discretionary income of most of America’s families in this anemic economy makes no sense economically or politically.”

Our thought is that such an approach positions Republicans anew as protectors of the working and middle economic classes.  Buchanan’s prescription then calls for

“a vote to extend the Bush tax cuts for another year, with a pledge to do tax reform — lowering tax rates in return for culling, cutting or capping deductions for the well-to-do in the new year.”

Getting an agreement to focus on real tax reform is key for us to even bother with this  scenario. The one year extension gives Republicans political breathing room to pursue it.

There are credible tax reform ideas that are at minimum revenue neutral as far as the federal government is concerned, their merit is that they would save individuals, businesses and industry enormous amounts in tax compliance costs, reduce government bureaucracy and reform the whole corrupt influence peddling legislative – lobbying  process.

Because it is likely that real reform (simplification) will spur growth in revenues, and conservatives should not be interested in increasing the size or discretionary income of government, the legislation should include a provision to require a sequestration of 100% of any year to year increased revenue to go to debt relief. Other actual discretionary spending cuts and cuts to egregious aspects to so called entitlement spending should be implemented to allow for rebuilding the military.

Buchanan continues: “Then let Harry Reid work his will. If the Senate votes to let Social Security taxes rise, let Harry and his party explain this to the middle class that gets hammered in January. If the Senate votes to let the Bush tax cuts lapse for those over $200,000, decide in the caucus whether to negotiate — or to go home for Christmas and New Year’s.

As for the automatic sequester that would impose $100 billion in cuts next year, half in defense, do nothing. Let it take effect. The budget has to be cut, and while these cuts are heavy on defense, the depth and mixture can be adjusted in the new year.

If Republicans walk away from tax negotiations with the White House, market investors, anticipating a sharp rise in tax rates on dividends, interest and capital gains next year, will start dumping stocks, bonds and investments to take advantage of the last year of lower taxes.

The market may tank. Let the party of high taxes explain it.

Brinkmanship? – not really in our judgement. We would add that the market degradation will be inevitable without conservative Republican reforms.  Without reform it serves to place primary blame where it is due. Real reform will come with either Democrats out of office or feeling the heat and voting for fiscal sense.

Not inconsistent with the essence of Buchanan’s approach the following was penned by Charles Krauthammer.

Obama is claiming an electoral mandate to raise taxes on the top 2 percent. Perhaps, but remember those incessant campaign ads promising a return to the economic nirvana of the Clinton years? Well, George W. Bush cut rates across the board, not just for the top 2 percent. Going back to the Clinton rates means middle-class tax hikes that yield four times the revenue that you get from just the rich.

So give Obama the full Clinton. Let him live with that. And with what also lies on the other side of the cliff: 28 million Americans newly subject to the ruinous alternative minimum tax.

Republicans must stop acting like supplicants. If Obama so loves those Clinton rates, Republicans should say: Then go over the cliff and have them all.

And add: But if you want a Grand Bargain, then deal. If we give way on taxes, we want, in return, serious discretionary cuts, clearly spelled-out entitlement cuts, and real tax reform.

Otherwise, strap on your parachute, Mr. President. We’ll ride down together.

If a prominent “paleocon” (Buchanan) and “neocon” (Krauthammer)  can agree on a basic strategy then we think the weak hitters in the Republican Party and legislative establishment should  take notice and understand that they have the support they need to do the right thing.

We also agree with John Fund writing in National Review that deliberations should be public. Otherwise Democrats will be more likely to get away with lying  about both theirs and Republican’s positions. And as he concludes:

The worst outcome for Republicans would be a preemptive surrender to Obama’s bullying. They would gain little in terms of policy, alienate their base, and acquire a reputation for being easily rolled.

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