Republicans recognize that without substantial reductions in government spending, the deficit will continue in an American death spiral, one that will continue to devalue the dollar and ignite inflation. But they're just as reluctant (read: "terrified") as most Democrats of cutting popular government mandates like Social Security and Medicare that make up the majority of spending. And no Republican in their right mind would cut defense, especially in wartime.
Responsible Republicans and Democrats both know there's not enough revenue to fund government spending. Both sides know they need to agree a tax plan, but both sides have their peculiar constituencies: Republicans, mostly business owners; Democrats, a vocal base of tax "the rich" class warriors.
Here's the compromise: (below the fold).
People who earn income from their business already segregate their "active" and "passive" income. Active income comes from actually running a business, producing goods, hiring workers and doing "stuff". Passive income comes from aggregated wealth -- the quarter share in the business your great-grandfather started and that you only know exists when you get your cash distributions as his heir. Or, from the rent on the property you don't manage, don't work on, and just collect a check from.
Enterpreneurial businesses, the people that do stuff and have active income, recognize their profits as "income" to their owners on a Form K-1. They pay tax on that income. But most owners plow most of those profits back into the business -- as inventory or systems or other invested capital that ends up, most times, in a job for somebody that's not so fortunate. Its the kind of behavior our tax system should encourage.
The folks that recognize passive income are what used to be called "the Idle Rich" -- living off their dividends, interest, and capital gains so that they can have more time to...uh, sit around. They don't really "do" anything. Sure, they may be involved in charities or causes, or they might be outrageous playboys (girls) or they might be creating the next great American novel. But its not behvior that the tax code should encourage.
So, how about this as a compromise on the Bush Tax Cuts law expiration: Let's keep the rate for active income where it is. Then, let's jack up the rate on passive income over, say, $250,000 to a hefty 45%? And if someone earns salary and dividends from the same business (like a CEO), so that they have both active and passive income from the same business, let's divide their interest and treat the salary as active income and then given them only up to $250,000 of low-rate dividend income?
Republicans couldn't possibly defend the lower tax rate on passive income, at least with a straight face. And Democrat "soak the rich" activists would be directing their propensity to tax on a class of the wealthy to whom they actually intend: the idle rich.
This is an easy change in the tax code, its politically viable, and its the better choice for the country.