Among House Republicans, there is a broad conviction that by forcing Senate Democrats to pass a budget resolution, the GOP might find itself in a more advantageous position. Rather than contrast Republican budget cuts against the status quo, they would be in a position to contrast Republican budget cuts against Democratic budget cuts and tax increases. Matt Yglesias believes that Senate Democrats will gain the upper hand, thanks to the political prowess of Sen. Patty Murray (D-WA):
Democrats are willing to cut domestic spending but only in the context of a deal that raises tax revenue and does it in a progressive way. A memo from her office circulated to other Senate Democrats on Thursday says, among other things, “Revenue Must Be Included in Any Deal,” boldfaced and underlined for emphasis. The focus is on closing or curtailing tax deductions rather than raising rates. It’s politically potent terrain since Republicans from John Boehner to Paul Ryan and beyond have agreed loopholes should be curtailed. The difference is the GOP insists revenue raised from loophole-closing should be spent on reducing tax rates. This sets up what Democrats believe is a winning political argument, with Republicans seeking deep cuts in valuable social programs to pay for what amounts to tax cuts for the rich.
To get a sense of the kind of tax reform Senate Democrats might outline, I’d recommend reading the Center for American Progress’s December 2012 proposal. The most striking aspect of the proposal is a sharp increase in capital income taxation. If Republicans insist that revenue raised from loophole-closing be spent on reducing tax rates for high-earners, I think Matt is probably right. Democrats will gain the upper hand.
But if, per Robert Stein et al., they instead call for using the revenue raised from loophole-closing for an expanded child tax credit that could be used to offset payroll taxes, the political terrain will be far more favorable to the right. This measure would primarily benefit middle-income households with children. Assuming Republicans advance entitlement reform measures, like the health entitlement proposals recently advanced by Sen. Orrin Hatch (R-UT), the expanded child tax credit could be seen as part of a new generational compact, in which old-age social insurance programs are modernized not to benefit high-earners, but rather to benefit the next generation, or rather those who are making significant sacrifices of time, money, and sanity to raise the next generation.
As a general rule, calls for fiscal consolidation grounded in the idea of an intergenerational compact are vague and annoying, despite the fact that the underlying logic is sound. Yes, lifetime net tax rates will be punishingly high for future workers due to long-term fiscal imbalances, but that is awfully abstract and asking older Americans to surrender benefits in the name of an abstraction is not going to fly. In contrast, asking older Americans to accept that old-age social insurance ought to be reformed to make them more sustainable and to see to it that their children and grandchildren can make tangible investments in the future is potentially far more attractive. If coupled with Andrew Biggs’ proposal that the workers over the age of 62 be exempt from the Social Security payroll tax, we suddenly have a fairly attractive fiscal policy vision for conservatives. The best part is that this approach recognizes the importance of the payroll tax for middle-income workers, particularly cash-strapped parents and older workers who are deciding whether or not to continue working.
This approach also aligns with Ramesh Ponnuru’s thesis that the most important aspect of a “starve-the-beast” strategy is curbing tax increases on middle-income households.