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Getting to “Yes”

President-elect Obama is meeting with Republicans and offering tax cuts, but Republicans remain wary of the stimulus plan. The Washington Post notes that the size of the spending package remains a concern, and even the tax cuts aren’t being welcomed with open arms:

Some prominent Republicans expressed reservations about the tax proposals’ specifics.  Jon Kyl (Ariz.), a member of the Senate Republican leadership team, said he hadn’t studied the list of proposed cuts, but that he favored reducing corporate and capital gains taxes, and providing more generous small-business incentives. And, he said, “These changes should be permanent, rather than just temporary.”

Sen. Charles E. Grassley (Iowa), the senior Republican on the tax-writing Senate Finance Committee, said he would prefer a tax package that is “inclusive rather than exclusive” and that offers relief to “as many as taxpayers as possible.” One option, according to a senior Grassley aide, would be to include a $75 billion provision to prevent the alternative minimum tax from applying to millions of additional families.

Plenty of conservatives are skeptical or downright suspicious. Is this some sneaky plot to saddle Republicans with responsibility for a stimulus package that won’t work or to set them up for a huge tax increase later?

Perhaps, but Republicans would be wise to keep two things in mind. First, they have won the rhetorical argument. The Obama team isn’t talking about any tax increases and is conceding that massive public sector spending isn’t going to solve our economic woes. That’s something, and it’s plenty to irritate the Left which is already aghast. Paul Krugman is in a frenzy:

Look, Republicans are not going to come on board. Make 40% of the package tax cuts, they’ll demand 100%. Then they’ll start the thing about how you can’t cut taxes on people who don’t pay taxes (with only income taxes counting, of course) and demand that the plan focus on the affluent. Then they’ll demand cuts in corporate taxes. And Mitch McConnell is already saying that state and local governments should get loans, not aid — which would undermine that part of the plan, too. . . $140 billion for Obama’s tax break for workers, which gives most workers $500. But it sounds as if the rest is mainly, perhaps almost entirely, tax cuts for business. Not very New Dealish.

And that brings us to the second point: Krugman is right. The Republicans needn’t accept whatever the Obama team presents. By declaring his intention to get Republican support, President-elect Obama has empowered Republicans to negotiate and suggest alternatives. Larry Kudlow praises some of the Obama business tax cuts while pointing to room for improvement:

However, as yet there is no Obama signal for the most powerful tax incentives that would slash the 35 percent top corporate rate to something around 20 percent. This should apply both to large C-corps and small-business S-corps. It would attract investment, improve future job creation, and relieve consumers who really shoulder the corporate tax costs. Additionally, full cash expensing for business investment write-offs would provide an even greater bang for the buck.

So while the new tax-refund plan and faster depreciation are positives, they are still much weaker than a full-bore supply-side tax-rate reduction that could even morph into full-fledged corporate tax reform. Now we wait for a Republican response, which hopefully will be bold corporate tax reform as well as reduced individual tax rates (at least for the middle class).

Republicans should get cracking. See if Democrats will vote down a corporate tax holiday or a capital gains cut. Try putting some meaningful restrictions on the boondoggle “shovel ready” projects and see if any Blue Dogs bite.

This is what life in the minority is all about: getting what you can and declaring small and partial victories when you can find them. And if the final package is better, say with a consensus behind business and individual tax cuts, and a moratorium on future corporate bailouts, that would be good for the country and a signal to the voters that Republicans are a source of constructive ideas. What’s wrong with that?



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