While Grover Norquist maintains his no new revenues pledge, Republican legislators are reported to be sounding a more reasonable note about being flexible by softening their position on raising more money from taxes, admitting the need for additional revenues to put the country's finances in order.
Is this the basis of a fair compromise? Are the republicans finally willing to defy Norquist for the good of the country? We should be skeptical...
The answer can be found in what the GOP has put on the table: they have offered only to raise new revenues by reducing loopholes, all in exchange for no change in tax rates. That strange bargain is problematic and revealing.
Many have observed that there's a couple of problems with trying to raise the needed revenues from closing loopholes. One is that it's hard to raise the same amount of revenue you can get by raising rates. The second is that the burden of closing loopholes will fall disproportionately on the middle class -- the very people Obama wants to protect. So it seems that the GOP is aiming to both minimize the amount of new revenue and put its burdens on the middle class.
But that's just for starters. The real reason why the GOP wants to offer reduced loopholes in exchange for keeping existing rates is that the very rich would be almost completely unaffected by closing loopholes. The rate increases that are coming, however, will hurt the rich.
Consider the GOP's presidential candidate, Mitt Romney. A lot of people were taken aback when whey discovered that he was only paying a 13.9% rate on his 2010 taxes. That low tax rate, widely perceived as unfairly low, helped boost President Obama's goal of not extending the Bush tax cuts for income over $250K past their January 2013 expiration.
So if we eliminate all tax deductions and closed every last loophole, how much would Mitt pay? A smidgen over 15%. Why still so little? Because Mitt's income is mostly from investment earnings, not wages, and under the current tax rates, investment income is taxed at 15% tops.
Compare that to what happens to Mitt on January 1st if nothing changes: his investment income is going to get taxed a higher tax rate, some of it at a lot higher rate.
When the Bush tax cuts expire, the very rich will find their tax rates for capital gains go up from 15% to 20%, and their tax rates for dividends go from 15% to 39.6%. You can see why the GOP wants to keep the rates unchanged.
And something else happens on January 1st: investment income becomes subject to an additional 3.8% medicare tax as part of financing the Affordable Care Act (the ACA, aka Obamacare). Combined, the expiring Bush cuts and the new ACA tax will raise Mitt's (and his fellow 1%ers') capital gains tax rate from 15% to 23.8% starting 1/1/2013. Talk about a financial hangover on New Year's day!
That's why Eric Cantor said, this morning, that Obama has to put the ACA on the table in any fiscal cliff talks. The GOP wants the medicare tax on investments repealed and rate increases on investment income stopped -- all to keep the super wealthy from paying more in taxes.
The GOP may be trying to present a new image of moderation and compromise, but beneath the image they are struggling to find a way to shield their ultra rich backers from any increase in taxes. Br'er Grover may yell and holler at the GOP not to throw him into the Briar Patch of closing loopholes, but we would only have ourselves to blame if we fell for his act.
