Resolution of the U.S. debt standoff will revolve around spinning tax increases into spending cuts.
Most Republicans refuse to consider revenue increases; most Democrats refuse to consider tampering with Medicare and Social Security benefits without some effort to force more revenue out of the rich and privileged.
If compromise is to be found, it will be in the more than $1-trillion (U.S.) the government yields each year through various tax breaks. The Treasury Department calls these "tax preferences" and has identified 170 of them.
The bipartisan Gang of Six proposal that has inspired hope of a grand fiscal bargain steps gingerly onto this field. The senators would "reform, not eliminate, tax expenditures for health, charitable giving, homeownership and retirement, and retain support for low-income workers and families," according to the outline of their program. (The Washington Post's Ezra Klein has a link to a PDF of the Gang of Six plan on his blog.)
In other words, the Gang is set on reducing the tax breaks Americans get on drugs, mortgage interest, donations to the food bank and any number of other good-intentioned incentives that have been written into the U.S. tax code over the years.
Most economists will tell you this is a good thing: simpler tax code, fewer economic distortions. (Donald Marron, director of the Tax Policy Center, discusses the issue in detail here.) Indeed, that is a goal of the Gang of Six. They would lower individual tax rates and drop the corporate rate to between 23 per cent and 29 per cent. The senators say their ideas would provide tax relief of about $1.5-trillion.
Here's where things get sticky. The Gang also wants to raise revenue. It believes this will happen through stronger economic growth, not by raising individual tax rates. The mere notion of raising revenue is anathema to the majority of Republicans in the House of Representatives.
But what if enough Republicans can be persuaded that a tax break, credit or whatever, is no different than a government spending program? That is what the Gang of Six is trying to do. "There is no tax increase," Oklahoma Republican Tom Coburn, a member of the Gang of Six, told Bloomberg Television on Wednesday.
Mr. Coburn has a point. In his paper, Mr. Marron explains that when the Treasury Department started tallying tax breaks in the 1960s, officials made a point of calling them "tax expenditures" so people would understand that government revenue was being used to achieve political ends.
"The rationale for viewing the preferences as expenditures, rather than mere tax breaks, was (and is) that their budgetary, economic, and distributional effects are often indistinguishable from those of spending programs," Mr. Marron wrote.
Many Republicans support a simpler tax code, so there should be grounds for compromise on an overhaul of tax policy. If an agreement continues to be elusive, then the Republicans will have shown their opposition to a grand bargain on deficit and debt reduction to be entirely political.