Tax, spending compromise possible

The good news heading into 2011 is that leaders in both parties seem genuinely interested in overhauling our tax code. President Barack Obama brought it up during a recent National Public Radio interview. New House Ways and Means Committee chair Dave Camp went on NPR a few days later to talk about the same thing.

So there’s genuine buzz – even bipartisan buzz.

But a fault line is developing, too. There are those, like the president, who believe any overhaul also should increase tax revenue, presumably to offset the deficit and debt. And there are those like Camp, a Republican, who want any tax overhaul to be “revenue neutral.” His crowd fears the extra revenues would only be spent.

Both positions actually are reasonable.

Let’s start with the Obama side:

If we are ever to beat back the $1.3 trillion deficit and nearly $14 trillion in federal debt, taxes must be part of the equation. Not the major part, mind you – more like a quarter of the answer, as former Comptroller General David Walker has suggested. But taxes belong in the mix, as the president’s debt panel pointed out last month in outlining its solutions for ending our addiction to red ink.

If we leave tax revenues out of the answer, we can’t raise enough through spending cuts to seriously drill down on both problems. Or, put it this way: We can’t reduce the deficit and the debt with spending cuts alone, not without gutting what many people consider essential functions of government. (Apologies here to libertarian Ron Paul, but most Americans don’t share his concept of limited government. We may gripe about Washington spending too much, but we don’t want to touch programs we like.)

I’m on Obama’s side of the divide, although I don’t know how much more money he envisions raising through tax reform. If it’s much beyond 25 percent of our deficit/debt goal, I’m not enthusiastic. But his point is legitimate.

But let’s look at the Camp side:

He, too, has a point. When it comes to deficit reduction, taxes almost always go up before we get to spending cuts.

Recall the 1993 deficit battle under President Bill Clinton. Delaying spending cuts was a major issue during the debate over Congress’ deficit package. Critics argued the measure postponed hard spending choices until after tax hikes went into effect.

Of course, there are any number of examples of Capitol Hill delaying painful change, largely because many Americans don’t like changing our ways. If nothing else, most legislators know how to read the will of the people, for whom pain isn’t high on their list.

So, in looking at this dividing line, here’s my strategy: Let’s have a deficit/debt reduction plan that puts many of the spending cuts up front, say, in the first five years, if the economy is strong enough to absorb them.

Then, let’s have a tax overhaul that leads to fewer and lower rates for individuals and businesses. Let’s also have only a handful of exemptions, such as for charitable giving. And let’s have that overhaul produce a net tax hike that would take care of about 25 percent of our deficit/debt reduction goal.

Will this happen?

Not without a lot of blood being spilled, much as we saw with the recent tax-cut compromise. Getting rid of tax perks many of us enjoy, like eliminating or capping the mortgage interest deduction, won’t be easy. But the compromise top Democrats and Republican reached before Christmas shows they at least can work together.

Here, then, is hoping for more blood – and a smart tax code/spending cut compromise – in 2011. The table is set, if only we can find a way past this dividing line.