Party like it's 1999!
If tax reform is a "Fiscal Cliff" goal, let's return to the '90s.
This morning I joined Becky Quick in Washington, DC for CNBC's "Squawk Box" and noted in my view that there are benefits to allowing my favored Bush income tax rates to expire and return to Clinton-era tax rates for everyone.
Don't get me wrong: returning to the higher Clinton income tax rates isn't ideal policy – it would certainly dampen economic activity, but those income tax rates alone would not be the calamity many Republicans, Democrats, and commentators now fear. In fact, they even have some benefits.
Here are my reasons for returning to Clinton-era tax rates:
1) The Obama plan of only raising the top two rates on the wealthiest Americans kills any chance of income tax reform. This is important to understand: tax reform was always going to be a long shot. The forces arrayed against reform are numerous, well-organized, well-financed, dispersed across the country, and are often sympathetic groups: charities, state and local governments, the housing industry, and homeowners, just to name a few.
But tax reform becomes practically and politically impossible if the tax burden is skewed to the top as the Obama plan intends. In fact, the wealthiest Americans will face an even higher top marginal tax rate than under the Clinton years due to the increased Medicare payroll and investment taxes in Obamacare. Tax reform requires creating winners, and the pool of winners has to come from people paying taxes. Those not paying taxes today have absolutely nothing to gain from tax reform. In fact, if we only raise the top two rates, the only people who would gain from income tax reform would be the wealthy. And we can't help the wealthy, so…no tax reform.
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The Clinton tax rates create a much better basis for tax reform because more Americans will actually be paying taxes and can benefit from reform.
2) Returning to Clinton tax rates is a natural policy outcome. For more than a decade Democrats consistently insisted that Bush tax rates should sunset. Republicans repeatedly tried to make the Bush rates permanent, but failed, and so they'll expire. Democrats insisted on returning to Clinton tax rates, and so that's where we'll go.
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3) Clinton-era income tax rates aren't calamitous, or dangerous, irresponsible policy -- they're merely sub-optimal policy. We're not talking about pre-1986 tax policy, or France's confiscatory 90% rate proposal. As Republicans, we abhor the higher tax rates – but we did live with these rates for eight years. Democrats can hardly wail and gnash teeth over their return. Since the 1990s, Democrats consistently argued that Clinton income tax policy was a fundamental basis for 1990s prosperity. And President Clinton, whatever his faults, was never accused of hating the middle class -- and neither should anyone else for allowing his income tax policy to return.
4) Tax policy is a big deal: it affects every working household in America. It deserves to be considered and debated in regular order, not in between Christmas tree lighting ceremonies and college bowl games. We should do tax policy the old fashioned way: with the Ways and Means Committee holding hearings and marking up legislation, and sending that bill over to the Senate for consideration. People want government to "function"? Regular order legislating would be a good place to start.
(Read More: Corker: Why We Should Just Raise Taxes on Rich.)
5) With a return to Clinton tax rates, both sides will be in a better position to compromise: Obama's red-line of no tax increases below $250,000/year for families will be violated, as will the Republicans' red-line of opposing marginal tax rate increases. Both Republicans and Democrats will instead be arguing about how much less government should take from people – not how much more. These are the conditions and urgency for reforming the tax code, lowering rates across the board – and balancing with spending cuts.
Republicans would be better off ending negotiations on tax rates and instead work to pass legislation dealing only with all other elements of the fiscal cliff: sequestration spending, AMT, payroll taxes, and the regular set of tax extenders.
And then we can achieve much better tax policy by first returning to the tax policy of 1999.
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Tony Fratto is a Partner with Hamilton Place Strategies and a contributor for CNBC.