Republicans Offer Yet Another Terrible Debt Deal

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The supercommittee meets in Washington back in September. Photo: Alex Wong/2011 Getty Images

The Congressional "super-committee" — the bipartisan panel established as part of the debt-ceiling deal and tasked with finding $1.2 trillion in deficit reduction — has been mired in stalemate for weeks. Democrats insist that any cuts in entitlement spending be matched by tax increases, while Republicans insist on no tax increases at all. Now it appears Republicans are actually willing to put an offer on the table. The offer is a really terrible offer, but it is an offer.

The news appears in an op-ed column by Stephen Moore, The Wall Street Journal’s lead economic editorial writer who has a frighteningly poor grasp of economics and, perhaps for that reason, is deeply plugged into the Washington GOP scene. Moore reports that Republicans are willing to increase revenue not merely through supply-side voodoo — which was their previous position — but through closing tax deductions:

One positive development on taxes taking shape is a deal that could include limiting tax deductions, perhaps by capping write-offs on charities, state and local taxes, and mortgage interest payments as a percentage of each tax filer's gross income. That idea was introduced on these pages by Harvard economist Martin Feldstein.

There is, however, a catch:

In exchange, Democrats would agree to make the Bush income-tax cuts permanent. This would mean preventing top rates from going to 42% from 35% today, and keeping the capital gains and dividend tax rate at 15%, as opposed to plans to raise them to 23.8% or higher after 2013.

Let me explain this part. The Bush tax cuts are scheduled to expire at the end of next year. This is a huge amount of leverage for Democrats — unless the House, Senate, and president can agree, taxes will return to Clinton-era levels at the beginning of 2013. The Republicans want to stop that from happening. The deal leaked to Moore is that they will agree to reduce some tax deductions, in return for which Democrats will agree to make the tax cuts permanent, in return for which Democrats will also agree to reduce entitlement spending.

Anybody see a problem with this deal? Yes: Democrats would be giving away an enormous amount of future leverage. Passing a bill to raise revenue is extremely hard. Passing any bill is extremely hard. When you stand to gain from nothing happening, you’re in a very strong position. Republicans used that leverage during the debt-ceiling fight — doing nothing meant the credit markets imploded, the economy melted down, and everybody started hating President Obama even more. That’s why Obama made a deal. Now "doing nothing" means the Bush tax cuts disappear. Democrats have no reason to give that away.

Now, if Republicans want to offer to trade tax deductions for entitlement spending cuts, that might be a decent agreement. I’d be pretty shocked if they made that deal. But Moore’s column does suggest the GOP is beginning to realize that it doesn’t have as much leverage as it did before, and stonewalling negotiations may not be an unadulterated triumph.