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The GOP needs to stop stupid ideas like limiting 401(k)s and face the real problem

  • The crazy plan to alter 401(k) tax rules is the latest dumb idea from a GOP hoping to avoid the obvious need: reduce spending.
  • But neither party has the guts to make the changes and reforms to the most expensive spending programs.
  • Cutting government spending can be just as stimulative to the economy as tax cuts.

The American people were treated today to another example of the congressional Republicans' contortionist act. This time it was over 401(k) plans. But the real story is how much the GOP congressional leaders will twist and turn and basically make themselves into a pretzel all to avoid one thing: Cutting the spending.

First, let's look at the most recent details. A report surfaced late Friday that the Republican tax-reform bill may include a provision that would limit tax-free contributions to 401(k) plans to $2,400 per year. An understandable howl went up over that one, as 401(k)s have become a major staple of retirement savings for millions of Americans, a key benefit employers offer via matching contributions, and a big money maker for Wall Street firms.

The good news for everyone worrying about this came early Monday, with a tweet from President Donald Trump promising no changes:

That could be the happy ending to a scary story if it weren't for the fact that there's no indication the Republicans in Congress won't try to come up with another cockamamie idea to raise tax revenue.

Just to review, they've already tried the Border Adjustment Tax that would have taxed imports and gutted major retailers' profits. That idea lived for much of the spring and summer before it was scrapped in late July.

They're still holding on to the plan to eliminate state and local tax deductions and even kept that plan alive with a 52-47 vote in the Senate Friday. Senator Chris Van Hollen, a Democrat from Maryland, is predicting that the national outrage over this plan will only get louder as the weeks go by.

There are more not-so-brilliant ideas, too, like reducing the deductions allowed for mortgage interest. But the bottom line is that the GOP wants to support tax cuts without giving up some level of the moral high ground it believes it owns when it comes to opposing the exploding national debt. That debt has basically doubled to $20 trillion since President Obama took office in 2009, and deficits are still growing under President Trump.

The stakes are being raised even higher as the GOP tax plan as we know it now will only grow deficits more. The Congressional Budget Office is projecting it would add $1.5 trillion to the debt over the next 10 years. The Trump administration is calling those projections inaccurate and also insisting that the added economic growth coming from tax cuts would boost revenues much more than the CBO estimates.

"It doesn't matter if tax cuts turn the economy from a row boat to a motorized yacht if we're collectively trying to navigate in a category 10 spending storm."

But either way, the most obvious way to fix these spending problems is to stop quibbling so much about revenues and reduce debt the way normal people do: Reduce spending!

Hey, we all get it. Nobody in power in Washington wants to risk losing that power by cutting the spending programs that millions of American voters like or depend on. But it's past time to start testing just how angry the voters would get if fair cuts and changes were made to the big three spending programs that cost taxpayers the most.

The "big three" are Social Security, Medicare, and defense spending. Again, the conventional wisdom is that there will be some kind of massive voter revolt if Washington even "touches" any of those programs, but people like longtime pollster Scott Rasmussen and others strongly disagree.

And the voters are already revolting over some of these other ideas anyway. If there's going to be a plan that risks voter backlash, why not face the biggest spending programs head on? The smarter and more courageous thing to do would be to level with the American people about the unsustainable spending on Social Security, Medicare, and defense and promise to only make needed changes one at a time and with as much voter input as possible. You would think we would be a bit closer to that happening as each Republican attempt to avoid the hard truths fails and fails again ... but we're not.

Don't expect establishment members of the Republican or Democratic Party to even try to level with the voters in that way. And anyone who thinks they might should take a really good look at how hard the GOP alone has been trying to avoid doing that this year.

The more likely scenario now is that the GOP will cling hard to the idea that revenues will rise thanks to lower taxes bringing more economic growth. It's the classic Art Laffer Curve/JFK reasoning that fueled the Kennedy-inspired tax cuts of 1964 and the Reagan tax cuts in 1981. And there's plenty of evidence that lower taxes do eventually boost economic growth and tax revenues.

But none of that matters when Congress keeps upping spending faster than growing revenues anyway. And that's exactly what's happened in 43 of the last 46 years, according to the Tax Policy Center. It doesn't matter if tax cuts turn the economy from a row boat to a motorized yacht if we're collectively trying to navigate in a category 10 spending storm.

Whether the Republicans pass a tax-reform bill this year, next year, or ever, the real issue in need of reform is spending. Washington has been spending more than it's taking from the taxpayers for so long that it can only think of new ways to take it away. The result is a spending regime that many economists believe is actually a drag on economic growth because it crowds out so much private sector investment and job creation. At some point, government spending ceases to be stimulative and just gets in the way.

But it will take a massive culture change in government to make real spending cuts happen. And so far, even the big changes that have come from President Trump's unconventional presidency haven't been big enough to alter the money-printing machine that is Washington, D.C.

Commentary by Jake Novak, CNBC.com senior columnist. Follow him on Twitter @jakejakeny.

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