Is a Compromise Even Possible in the Debt Talks?

            Watching the back and forth between the President and the U.S. House of Representatives makes one thing exceedingly clear: there is a major division between the two parties over taxation. In attempts to control the swelling debt crisis in America, both parties have agreed that something needs to be done about federal spending. That much should be clear to anyone. However, in addition to a restructuring of government spending, the Democrats want to consider tax increases aimed at the wealthier population of Americans to increase revenues. Republicans refuse to even entertain that thought. In fact within the last couple of days, Republicans have refused a 4 trillion dollar deficit reduction plan because it included tax increases. But why? Republicans made a big fuss about decreasing the federal deficit, why won’t they increase revenues to fight the deficit? I believe that the Republicans have a valid reason to fight increasing taxes. But not only that, I believe that the Republicans can keep their promise to prevent tax increases AND still be able to compromise with the Democrats to work out an effective deal to lower the federal deficit.

            Literally every news article about the debt-ceiling talks states that the Republicans think that increasing taxes would be a job killer. Republicans fear any increase in taxes will hurt economic growth and recovery. The idea is that taxes are just like any other expense that a business must face. If the expense is too high, the business suffers. It must either cut jobs or raise prices. Both options would be disastrous to a slowly recovering economy. So Republicans are simply trying to avoid creating another recession as they work out the budget talks. Corporate tax is already hovering around 34%-39% for businesses earning more than $75,000 a year. I would rather see that 34% reinvested into the economy than run through the gears of the government.

            Now some of you may be saying to yourselves, “Yeah, yeah, yeah, tax rates for businesses are high, but businesses never pay close to 34% of their income in taxes because they have all these tax loopholes and corporate exemptions.” And if you are saying that to yourself, you are absolutely right; big businesses don’t pay close to what their tax bracket says they should pay. These loopholes by themselves cost the government billions in tax revenue. Democrats have been rightly railing against the Republicans for not fighting aggressively to close loopholes as part of these deals.

            Now let’s hold up on this point for a second. At the end of the day we need to see the government pull in more revenue for any compromise to happen. As it stands businesses should pay somewhere around 34% in taxes on their income but they have found a lot of ways to dodge it. This has dramatically decreased the government’s tax revenue. Therefore it’s hard to believe that further increasing taxes would substantially increase revenues. Businesses would just wriggle their way out of it.

            If there is to be a compromise, I believe it will be found in the model set by Andrew Mellon. Mellon, the successful banker whose wealth peaked around 300 million dollars, was appointed Secretary of the Treasury under the Harding administration in 1921. Similar to today, Mellon had to find a way to increase revenue and decrease federal spending to pay the debts incurred in WW1. Mellon noted that when taxes were too high people just avoided paying them. Business taxes in those days came in around 72%.  In his mind the government was a business, and just like a business the government could only charge what the people could pay. To charge any higher would hurt the government in two ways. First it would slow economic growth by forcing businesses to pay taxes instead of reinvesting that money in their company. This meant that businesses couldn’t easily seek new opportunities to increase income, thereby decreasing the total amount of taxable income for the government. Second, as stated above, businesses would seek out ways to avoid paying the taxes.  So for Mellon the plan was simple: allow businesses to pay a lower, fairer tax and insure that businesses pay what they are taxed. And that's what he did. He decreased business taxes to 24% and closed loopholes with the result being an increase in federal revenue.

            I believe Mellon’s plan is the perfect middle ground for Republicans and Democrats. Republicans don’t have to raise taxes and Democrats can reform tax laws to cut out loopholes for businesses, something they have historically championed. Not only do both parties get to save face and earn points with their own voters, they can also focus their energies on fixing entitlement programs like Social Security and Medicare; something neither party seems to be handling well. But that’s just my two cents; in the comments below, I’d love to hear what your solution is.

Tyler Holmes

Proverbs 14:15