Republicans Raise Taxes

Republicans in Congress softened their position on taxes yesterday, when 34 GOP senators voted to repeal tax breaks for the ethanol industry. The proposal, which was added as an amendment to an economic-development bill, failed, but the vote shows that at least some Republican lawmakers are willing to back revenue hikes to cut the deficit.

Grover Norquist, the longtime head of Americans for Tax Reform, a conservative group, lobbied hard against the ethanol repeal, arguing that closing tax loopholes was no different than an outright tax increase. But a majority of Republicans in the Senate repudiated Norquist and handed a big victory to Sen. Tom Coburn, who co-sponsored the measure with Sen. Dianne Feinstein. Coburn, who was part of the "Gang of Six" -- a group of lawmakers that tried and failed to come up with a bipartisan budget deal -- has argued for the need to combine spending cuts with increase revenues, which has made him an outlier in his party.

The ethanol vote is the latest and biggest sign that the GOP might not be so implacable after all on fiscal issues. While House Speaker John Boehner has said often in recent weeks that new taxes are off the table, Republicans have signaled that "tax reforms" that raise revenue might be okay. In March, 32 Senate Republicans, including Coburn, co-signed a letter with 32 Senate Democrats urging President Barack Obama to include "discretionary spending cuts, entitlement changes and tax reform" in any deficit-reduction plan. The letter embraced the approach of the president's fiscal commission, which called for $785 billion in revenue increases, mostly by reducing tax breaks.

Appearing on Fox News last month, Senate Minority Leader Mitch McConnell said that Republicans were dead set against higher tax "rates." Asked by Chris Wallace if his language meant that he was open to raising revenues by closing tax loopholes, McConnell dodged the question and said he didn't want to negotiate a budget deal on the program.

The ethanol vote brought to light fissures within the GOP on tax breaks -- and indicates that it is getting safer for Republicans to back revenue increases. One possible reason for this turnaround is that two powerful players in the conservative world voiced their support for Senator Coburn's proposal. The Club for Growth, long a top enforcer of anti-tax extremism in the GOP, said last week that tax subsidies for ethanol were "an abomination, a bad deal for taxpayers, and destructive to economic growth." As reported in the Huffington Post Monday, Coburn received a letter from Koch Industries -- whose owners David and Charles Koch have pledged to raise $88 million in the 2012 election cycle ---stating that it backed his proposal.

After the ethanol fight, it's clear that Republicans can vote to end tax breaks -- and raise revenue -- without facing a unified backlash from the conservative movement's hardline powerbrokers. This means that a bipartisan budget deal, while still a heavy lift given the two parties' differences on spending, is now far more feasible.

It also means that Democrats and progressives had better get their thinking straight about which tax breaks they support cutting.

Fortunately, progressives already have some good ideas in this department. According to the Center for Tax Justice, closing corporate tax loopholes could raise tens of billions dollars a year. That is what happened in 1986, when Congress eliminated a wide range of corporate tax breaks -- also known as "broadening the base" -- while also lowering top rates on business. A similar bipartisan deal today could raise $750 billion over the next decade. Placing a cap on itemized deductions for individual filers, including for home mortgage interest, could also raise hundreds of billions of dollars in the next ten years. This idea was proposed in the fiscal blueprint that Demos, the Economic Policy Institute, and the Century Foundation released last November. (Editor's note: David Callahan is a Senior Fellow at Demos.)

Other juicy targets are the tax expenditures for retirement savings and employee-provided healthcare. Like the mortgage interest deduction, these breaks mainly benefit affluent Americans and have famously been dubbed "the hidden welfare state" by author Christopher Howard. All three subsidies together cost the U.S. Treasury over $500 billion a year.

Radically paring back popular tax breaks won't be politically easy and won't solve all our fiscal problems. Other revenue hikes will also be necessary, like rolling back the Bush tax cuts for the wealthy. But even modest tax reforms could make a real dent in the deficit while also creating a more progressive tax system. This is an area where Republicans and Democrats can truly work together. Many conservatives have long despised the market distortions and social engineering they associate with tax breaks, while progressives have been sharpening a critique of how most of these breaks siphon wealth upward.

And what political leader doesn't want to claim success at simplifying America's absurdly complex tax code?

It's not often that you see ideological convergence in Washington. In that respect, Tuesday's ethanol vote may prove a historic turning point.

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