Big budget requires small compromises

Republicans and Democrats have both proposed federal budgets, the first time in years that each has come up with a plan.

Both parties call for tax increases and spending cuts.

The difference is mainly about what each would do with the money from the tax increases. 

The Republicans would raise some taxes to reduce others. The Democrats would cut the deficit.

The GOP plan is based on the idea that tax cuts stimulate the economy. An improved economy produces more tax revenues and, when spending is under control, the new revenues would make it possible to reduce the deficit.

The Democrats have a more direct approach. Use new tax revenues now, they say, to trim the deficit.

One way or the other, both say they want to reduce the annual federal deficit. Unfortunately, when it is in power, each party increases the deficit, often by catering to the interests that contributed to its election success.

The picture that emerges shows both parties seem somewhat less serious than they claim to be about cutting the deficit.

Recently, some Democrats have admitted they favor a permanent annual deficit, provided it’s not too large. Because some federal spending benefits future generations, they say, it’s all right to pass some of the cost on to them.

What taxes would the GOP cut? They complain that, at 35 percent, the federal corporate tax rate is among the highest in the world. They want to reduce it.

The corporate tax rate would be a reasonable target, if only companies actually paid it.

Last year, General Electric, a huge, diversified company, paid 14.4 percent in taxes on its profits. It can take advantage of tax preferences — more commonly called loopholes — that allow it to exclude income from taxation.

And Fairchild Semiconductor paid no taxes at all. It can take advantage of having lost money in earlier years, a feature of the tax law that does not apply to most individual taxpayers.

A cut in the corporate tax rate would mostly benefit the corporations concerned.

The budget choice is to raise taxes or cut the programs. In either case, the federal government would continue to run deficits.

Beyond taxes, the main differences between the parties are about cutting spending on Medicare, Medicaid, and Social Security. Republicans want to reduce these entitlement programs, but Democrats aren’t enthusiastic about such rollbacks.

The elusive “Grand Bargain” would deal with all issues — taxes, entitlements and deficits. 

The parties are so far apart, even to the point of allowing the sequester to kick in, that such a deal seems impossible.

One solution is for a party to take control of the presidency, the House of Representatives and a filibuster-free Senate. That’s not likely, leaving compromise as the only alternative to more deficits.

Let’s say each side was willing to hold its nose and accept something less than perfect. 

Taxes could be increased with some of the money going to deficit reduction and some of it going to tax reform that could result in lower taxes for middle-income people.

The first step on this approach is to close as many of the worst loopholes as the parties can agree upon. That’s not as impossible as it sounds, because there is already agreement on getting tough on a few tax breaks.

But that step won’t produce enough revenue. The total amount of loophole benefits that any taxpayer — individual or corporate — can use could be limited to a fixed percentage of gross income. Taxpayers could still choose their loopholes, but within limits.

In setting a cap on loopholes, Congress would have a good idea how much revenue would be raised. As the economy changes, the cap could even be adjusted.

That way, Congress could keep adding loopholes as it inevitably will, knowing the effect would be limited by the cap.

If too much of the income of the wealthy or of companies doing business abroad still escaped taxation, the much maligned “alternative minimum tax” could be made to do what was originally intended. It was meant to nullify or limit tax avoidance features used mainly by the wealthy.

In short, all of these measures show that it is possible to increase tax revenues without touching current tax rates.

Some diehard GOP House members won’t accept any compromise. But electoral reality could push other House Republicans to join with Democrats in finding a compromise.

Without abandoning their widely opposed positions on taxes and spending, the parties ought to concentrate on finding small steps on which they might both agree. We’d call that progress.