The Senate's deficit reduction magic trick

The "Gang of Six" wave their magic wands: We can raise revenues and cut taxes at the same time!

By Andrew Leonard
Published July 19, 2011 7:08PM (EDT)
Sen. Tom Coburn    (AP Photo/J. Scott Applewhite)
Sen. Tom Coburn (AP Photo/J. Scott Applewhite)

Be still, my beating debt ceiling heart! Sen. Tom Coburn, R-Ok., has rejoined the Gang of Six! And suddenly, a new deficit reduction plan is emerging from the Senate, to the soundtrack of mega-hype from the likes of Politico and the Wall Street Journal.

If you haven't been following this soap opera, here's a quick recap: The "Gang of Six" is a bipartisan group of senators who have been toiling for months to come up with a plan that can get to 60 votes. But its deliberations were thrown awry in May, when Coburn jumped ship, declaring that negotiations were at an "impasse."

But now he's back! And on cue, the Senate has a new plan to cut $3.7 trillion over 10 years.

Progressives will find all kinds of nasty things in this plan -- cuts to Medicare and Social Security, etc. But we'll lambaste that another day: The only pertinent question right now, with the debt ceiling deadline hurtling toward us, is how the Senate's plan addresses the key stumbling block preventing the White House and House Republicans from making a deal: taxes. Obama has supposedly drawn a line -- no big deal without new revenues. But the House is equally obstinate: no tax hikes, no matter how they are defined, period.

Magically, the Gang of Six's plan simultaneously raises revenue and cuts taxes! Everybody wins!

From the Wall Street Journal:

A key question remains whether the plan might receive any support in the House, where Republicans have strongly resisted any new proposal that could bring in new taxes. The gang's plan would bring in $1 trillion in new tax revenue over 10 years by narrowing several tax breaks. But Mr. Conrad said it would also lower tax rates and end the alternative minimum tax. He said the combination of tax changes would be viewed by budget experts as a $1.5 trillion tax cut.

Get that? It raises $1 trillion in revenue, but gets scored as $1.5 trillion tax cut. Nice work!

How does this magic trick work? The key is in the phrase "end the alternative minimum tax." This is exactly the gimmick I discussed here two weeks ago:

...the Alternative Minimum Tax "offset" is the all-important fig leaf in this deal. Originally intended to prevent wealthy Americans from claiming too many deductions on their taxes, for years the AMT has threatened to gouge progressively bigger chunks of flesh from middle-class Americans. But "threatened" is the operative word here, because Congress keeps patching the tax code on a regular basis to let millions of taxpayers off the hook. By applying revenue increases derived from closing loopholes and ending tax breaks to permanently fixing the AMT, Republicans and Democrats can make a real dent in the deficit while claiming that there has been no net increase in taxes.

This is precisely the kind of thing that both sides can declare victory on. There will be no "net" increase in tax revenues because fixing the AMT is an expensive proposition. The Tea Party hardcore in the House may still vote no, but with people like Tom Coburn in the Senate giving the plan their imprimatur, enough Republicans will join with Democrats to get the necessary votes for passage.

Obama has already announced his support for the plan. Next step: The Senate and the White House force it down House Republican throats.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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