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Sun Nov 18, 2012, 09:05 AM

Here's What The "Fiscal Cliff" Tax Deal Is Starting To Look Like...


THE election dust had barely settled when Barack Obama and his Republican adversaries returned to their traditional rhetoric over taxes. "Raising tax rates is unacceptable," John Boehner, the Speaker of the House of Representatives, declared on November 8th. The next day Mr Obama said "I am not going to ask students and seniors and middle-class families to pay down the entire deficit while people like me, making over $250,000, aren’t asked to pay a dime more in taxes."

Optimists, however, took note of what the men did not say: Mr Boehner did not rule out raising tax revenues. Mr Obama did not explicitly insist that the two top income tax rates, now 33% and 35%, return to 35% and 39.6%, as they are scheduled to do when George W. Bush’s tax cuts expire at the end of this year.

This has aroused hopes that the two men can find common ground on tax reform that leaves marginal tax rates where they are while raising new revenue by curbing credits, deductions and exemptions (collectively called tax expenditures), which distort economic activity. Numerous such proposals have been aired in recent years, some of which Republicans hated because they raised new revenue; others Democrats rejected because they gave a windfall to the wealthy.

One way this could be done is to target deductions that primarily benefit the rich. During the election campaign, Mitt Romney proposed paying for big marginal rate cuts by setting a cap on total deductions. The Tax Policy Centre, a think-tank, reckons a cap of $50,000 would raise $749 billion over ten years, comparable to the $800 billion that Mr Boehner entertained during failed negotiations with Mr Obama in 2011. Importantly, this fix would make the tax system much more progressive: 80% of the additional money would come from the top 1% of earners. This has helped draw interest from some Democrats.

Read more: http://www.businessinsider.com/fiscal-cliff-taxes-2012-11#ixzz2CaCM1mCB

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