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The Non-Grand Bargain That Might Pass

I've had two discussions with Obama administration officials who have expressed eerie optimism that they can get Republicans to accept a deal with higher revenue. It never made sense to me. But this outline of a potential deal, from Jay Newton-Small, actually makes perfect sense:

a more modest package for roughly $1.7 trillion to $2.3 trillion in cuts with upwards of $500 billion in revenue increases, including $40 billion to $60 billion from ending tax breaks for corporate jets, yachts and race horses (and, possibly, a proposal to stop taxing hedge fund managers’ income as capital gains, thus subjecting it to a higher rate); plus $150 billion to $200 billion in increased revenues from requiring more pension contributions from federal employees, broadcast frequency auctions and getting rid of farm subsidies; and another several hundred billion dollars from pegging inflation to the Consumer Price Index. All of the new revenues would be offset by a permanent or long-term Alternative Minimum Tax fix, a popular bipartisan move, thus satisfying the Grover Norquists of the world. This deal would include modest Medicare cuts, but to providers only, and could also include some short term stimulus such as an employer payroll tax holiday.

Let me try to explain what this means. The "Alternative Minimum Tax" is kind of a parallel tax rate, created in 1969, designed to ensure that very rich taxpayers didn't amass so many deductions that they could avoid paying any taxes. If your tax rate falls below your "alternative minimum tax rate," then you have to pay the AMT rate instead. It's sort of a failsafe tax rate.

The AMT has, over the decades, inadvertently grown to a point where it hits non-rich taxpayers, especially ones in high-tax states. Congress has responded by continually passing "patches" that keep the AMT from growing. Since these patches are passed generally a year or two at a time, the law assumes that the AMT will continue to grow in size and raise taxes at lower and lower income levels. The AMT is one of the differences between the budget baseline that assumes current law, and which shows the deficit falling to a modest level -- and the budget projections that assume current policy.

So according to Newton-Small, one possible deal will raise a lot of taxes, but offset the revenue by permanently fixing the AMT. That way, conservatives can say that they didn't vote for a net tax hike -- they just voted to close some loopholes and plow the revenue back into other tax reductions. This allows them to avoid contradicting their sacred pledge to Grover Norquist never to support a revenue increase.

But wait, you ask! How does this help the deficit problem?

The answer is that if you assume that Congress will continue to patch the AMT year after year anyway, then the revenue loss from that "tax cut" isn't real. You're just accounting for revenue that would be lost anyway, but paying for it rather than financing it with debt. In other words, you're turning a future assumed debt-financed tax cut into a future paid-for tax cut. That's genuine budget savings.

I still think that a grand bargain probably can't pass the House. But this kind of agreement may have a real chance.

If I had to guess right now, I'd guess that this is what Obama and Boehner are going to try to do. Obama's leaks last night about supporting a grand bargain may reflect a genuine willingness to pass a deal like that, but Obama knows full well it won't happen. He's just demonstrating that the reason the deal doesn't do more is that Republicans, not the administration, refuse to go higher. It's positioning. If there's a deal, I expect it to be something like this.