Negotiations

The President today invited Congressional Republicans to in-person negotiations beginning next week, to resolve the way forward given the scope of the tax and spending policies set to take effect on Jan 1, 2013. Just a few points:

• The most important tax reform decision is really at what level of GDP we aim for balance, to be achieved when. Marginal rates, deductions, and fairness are key parts of the puzzle, but the what amount of revenue we aim to collect is key. It is going to take more of a revenue increase than can be gotten from just raising the top marginal tax rate.
• Speaker Boehner noted some desire to revisit Obamacare after noting (and then maybe walking back) his obvious observation that the law is now here to stay. There are a variety of things that could be done. If I were going to pick only one, it would be replacing the cadillac tax with a more straightforward capping of the tax exclusion of employer provided health insurance (though maybe it should be delayed until exchanges are up and going). This would maintain the coverage expansion aspects of the law, while increasing its cost saving potential. My book provides a set of health options that I claim represent what the two parties would negotiate as a way ahead, if they did so based on policy.
• A key sticking point is the top rate. I suggest a way out of the box that would have us raise the top individual rate, make dividends and capital gains normal income (taxed at same rate as other income), while ending the corporate income tax. This would have to be done in conjunction with a full reform of the individual income tax code as well, which could result in the lower marginal rates being reduced while deductions and exclusions were pared back.
• Health care is by far the biggest long term spending problem, so we will have to continually revisit reform. We need to identify a mix of policies to address costs while seeking to expand coverage and ensuring quality. Interestingly, there are many who express support for the Fiscal Commission approach (Simpson-Bowles) but who still seem to want to get rid of or greatly pare back Obamacare. The Fiscal Commission report assumed implementation of the law and laid out a series of next steps which are mostly reasonable. There seems to be a great deal of selective memory about what was in the report.