Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

A radical (and simple) proposal to end the budget battle

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The news from the nation's capital is all about how Republicans are preparing to surrender to the Obama administration in the debt ceiling and government shutdown standoff. The debt ceiling will be raised, a continuing budget resolution passed, and Republicans will walk away empty handed. That, at least, is the way things look now.

But when they look at their empty hands, Republicans might want to ask themselves: what was it we hoped to gain?

It was always unlikely that the Obama administration would agree to delay the implementation of Obamacare.

In the eyes of the Democrats, Obamacare is the single most important accomplishment of the administration. When top Democratic politicians talk among themselves, they describe the Affordable Care Act as a grand historic triumph, the product of decades of work by progressives.

That's not something you can expect anyone to give up as part of a budget compromise.

There's talk that the Obama administration might be willing to delay or repeal the medical device tax. If this is what the Republicans win, it may even be worse than walking away empty handed. It will look like the Republican Party shut down the government just to win a gift for corporate backers.

This is, in many ways, a crisis in search of a cause. Republicans are fighting the good fight—it's just not clear what they are fighting for.

That's very odd. For most of my life, Republicans fancied themselves as members of the "party of ideas," as Democrat Sen. Patrick Moynihan described the GOP in 1981. How has the party of Ronald Reagan found itself bereft of vision?

The answer is that they have lost faith in one of the most important policies in the Republican armory: The tax cut.

Debt ceiling negotiations underway

Think about how different this budget battle would be if the Republicans coupled their resistance to regulation and Obamacare with a plan to give every working American a raise. A proposal that combined cuts in income taxes, payroll taxes and capital gains taxes would radically shift the very terms of the debate.

The tax cuts could be linked directly to the deficit ceiling. For every dollar the ceiling is raised, cut $2 in taxes. Cut $3 in taxes. Cut $5.

(Also read: Deb Ceiling: Are Obama bonds the answer?)

Would the Democrats insist that the government remain shut down unless the Republicans gave up their tax-cut proposals? Would they refuse to raise the deficit ceiling if it were tied to tax cuts? Of course not. That way lies political suicide.

The professional deficit scolds will say the plan is irresponsible. But with the economy running on Federal Reserve fumes, this argument makes no sense. Taxes are "fiscal headwinds." They are a drag on our economy. The only irresponsible thing to do is continue current tax levels despite a lagging economy.

Look. No one really knows if or how quantitative easing works. We can't magically change the "animal spirits" part of the economy. Banks are still smarting from their traumatic experience with mortgage innovation. Credit growth isn't going to be an economic driver any time soon.

But taxes are in our control. We don't have to raise a dime in taxes more than we want to. It's a knob on the economic dashboard that is clearly labeled "In an economic slump, pull here." People paying less in taxes have larger paychecks. They can reduce their debt burdens, spend more, and invest more. It's the clearest, brightest path to a more robust economy.

The budget deficit will not explode if we cut taxes. Budgets deficits aren't bombs. They are the accounting evidence of government spending and government taxing.

Shifting government revenue from taxing work and capital to selling bonds to willing buyers is not going to destroy anything.

(Read also: The debt ceiling is scarier than the fiscal cliff)

What about interest rates? Won't they soar? Won't tax cuts wake the sleeping bond vigilantes?

This worry is based on a fundamental misunderstanding of bond markets. Take a look at what happened during the large increase in national debt during the Obama administration's early years. Why didn't this push up interest rates? Why are interest rates so much lower now than they were, say, when Ronald Reagan took office?

The answer is that rates were high then because the Paul Volcker-led Fed was fighting inflation. They are lower now because the Fed is trying to provide extraordinary accommodation to the economy. Notice that bond vigilantes don't show up at all. We don't have vigilantes setting the price for our debt—we have bureaucrats at the Fed setting the price of our debt.

If we cut taxes deeply enough, the Fed might very well start to raise interest rates sooner than it otherwise would have. But this would be a happy story. The Fed would be raising rates because the economy was performing better.

We've been here before. Only back in President Jimmy Carter's days they called it "malaise" instead of "the new normal."

"They say that the United States has had its day in the sun; that our nation has passed its zenith. They expect you to tell your children that the American people no longer have the will to cope with their problems; that the future will be one of sacrifice and few opportunities," Ronald Reagan told the Republican convention in 1980.

Sound familiar?

Here's how The Gipper responded to the scolds in his day:

My fellow citizens, I utterly reject that view. The American people, the most generous on earth, who created the highest standard of living, are not going to accept the notion that we can only make a better world for others by moving backwards ourselves. Those who believe we can have no business leading the nation…

When I talk of tax cuts, I am reminded that every major tax cut in this century has strengthened the economy, generated renewed productivity and ended up yielding new revenues for the government by creating new investment, new jobs and more commerce among our people…

When those in leadership give us tax increases and tell us we must also do with less, have they thought about those who have always had less -- especially the minorities? This is like telling them that just as they step on the first rung of the ladder of opportunity, the ladder is being pulled out from under them. That may be the Democratic leadership's message to the minorities, but it won't be ours. Our message will be: we have to move ahead, but we're not going to leave anyone behind. Thanks to the economic policies of the Democratic Party, millions of Americans find themselves out of work. Millions more have never even had a fair chance to learn new skills, hold a decent job, or secure for themselves and their families a share in the prosperity of this nation.

It is time to put America back to work; to make our cities and towns resound with the confident voices of men and women of all races, nationalities and faiths bringing home to their families a decent paycheck they can cash for honest money.

For those without skills, we'll find a way to help them get skills.

For those without job opportunities, we'll stimulate new opportunities, particularly in the inner cities where they live.

For those who have abandoned hope, we'll restore hope and we'll welcome them into a great national crusade to make America great again!

A great national crusade to make America great again. Beginning with a tax cut. Surely this is an idea whose time has come…again.

—By CNBC's John Carney. Follow him on Twitter @Carney