Okay, fine. But no one wants to raise middle-class taxes. That's not the issue. And even if those numbers are right, they dodge one of the key points in the dialogue between President Obama and House Speaker John Boehner. Namely, what to do about top income-tax rates, which include capital gains, dividends, and inheritance taxes?
The president once again avoided the term "tax rate" in his latest round of fiscal-cliff comments. He basically said, Let's get this done before Christmas in a fair and balanced way. But what is balance? (Read More: Is Obama's 'Fiscal Cliff' Proposal a Deal-Breaker?)
Speaker Boehner, in a Republican concession, is willing to cap upper-end deductions, a move that would produce several hundred billion dollars in new revenues while preserving marginal-tax-rate growth incentives, including those for successful small-business owners.
Obama did refer to a Senate Democratic bill that would raise top tax rates while leaving everything else in place. Question is, is Obama rebuffing the Boehner offer? That's key to a fiscal-cliff deal. Higher tax rates? Or revenue-producing tax-deduction caps?
Another key point: Obama never mentioned spending cuts. Never. Not once. Yet Boehner has argued that the Republican revenue concession depends on some entitlement cuts as well as other spending reductions that would make up the trillion dollars or so in the across-the-board sequestration plan that appears to have been junked by both parties. (Read More: 'Cliff' Talk Sends Stocks on Roller Coaster Ride.)
Even the Washington Post is criticizing Obama for failing to deliver a specific plan regarding entitlement and non-entitlement spending cuts. And Democratic senator Dick Durbin has added that taxing rich people will not overcome the gargantuan entitlement deficit, which some estimate to be $68 trillion over the decades ahead.
Unfortunately, Durbin doesn't want entitlement changes this year. He wants to put them off until 2013. Why does everybody want to put spending cuts off until next year? It doesn't work. It won't persuade the financial markets or the credit-rating agencies. Small, money-saving entitlement reforms, like cost-of-living adjustments and raising the eligibility age, would be a useful down-payment within this year's fiscal-cliff deficit deal. (Read More: Fiscal Cliff Talks Stalled, Warns Dick Durbin.)
And herein resides the GOP leverage, if they choose to use it. Republicans should not sign a tax deal that doesn't have a sizeable spending component. And they should argue that a smaller spending share of GDP is actually a tax cut stimulant for the economy, and that it would give confidence to the business and financial worlds as well as the rating agencies that Washington is on the right track. And the GOP should use this leverage to press on with the idea of capping deductions, rather than raising top rates on successful earners, small businesses, and investors.
Now, some people argue that Senate Democrats, and perhaps the president, should just let all the tax cuts expire this year. That of course would bring on a recession, or at least an even more anemic economy. Just blame the Republicans, it is said.
But I don't buy this. Why? Because the president does not want a second recession during his watch. Herbert Hoover Obama is not the legacy he's after.
And that's why Republicans should hold firm to their principles on spending and tax rates. Then, next year, new efforts for deeper tax and entitlement reforms can proceed in an orderly way.
But no deal will happen until the president unveils his entitlement and spending ideas. It's good that both Obama and Boehner are trying to keep an optimistic tone to this discussion. But so far, the key issues have not been resolved.
-By CNBC's Larry Kudlow
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