The Outlines of a Post-Election Tax Deal

President Barack Obama must work with Republicans to address the contentious tax issues facing the country.

By + More

David Shulman is a retired Wall Street executive who is now a senior economist at the UCLA Anderson Forecast. He is also affiliated with Baruch College (CUNY) and the University of Wisconsin.

Although Tuesday's election left the Capitol pretty much where it started, there remains a chance that both parties can achieve a compromise on the very contentious tax issues that have gridlocked the legislative process. Why? Simply put, President Barack Obama has to look presidential and the Republican leadership in the House fully realizes that they will be dealing with the president for another four years. They can't be blamed for poisoning the well so early in the president's second term. There will be plenty of time for partisanship later.

I think President Obama and the Republican leadership just might be able to accept the deal I have in mind. To be sure, taxes for high-income earners have to go up, but it is not clear that the president is so locked into imposing the Clinton-era tax rates for families earning more than $250,000 a year. If that is the case—and I admit it is a big "if"—then the outlines of a deal can come quickly into view.

[See a collection of political cartoons on the budget and deficit.]

Here is the outline of a deal: Tax rates go up, but not to the Clinton tax rate of 39.6 percent (before the 3.8 percent healthcare tax). Perhaps 37.5 percent would work. Further the $250,000-a-year income level might not be cast in stone; I am sure there many representatives from high cost states like New York, California, and Maryland who would prefer a cut-off at, say, $400,000 a year.

To make up for some of the lost revenue, some sort of modified Buffett rule might come into play where families earning over $1 million dollars a year might lose all or most of their deductions, save for charitable contributions.

[See a collection of political cartoons on Congress.]

As far as capital gains and dividend taxes are concerned: It would be very straight forward to set the capital gains rate at the 20 percent Clinton-era rate as President Obama has proposed and set the current 15 percent dividend tax rate at 20 percent as well. Again, that is before the 3.8 percent healthcare tax. To be sure this represents a significant increase in capital taxation, but those rates, especially for dividends, would be far lower than what they were for most of the postwar era. Of course as part of deal the new rates would have to be made permanent.

What I have outlined would leave in place a reasonably low tax regime and it would achieve President Obama's goal of increasing the tax burden on America's wealthier families to reduce the deficit, and politically it would make far easier for the Republican leadership to tackle entitlement reform—especially after the election we just had. It would be very hard to contemplate any scenario that cuts entitlements without a modicum of tax increases.

[Read the U.S. News Debate: Do the Rich Pay Their Fair Share in Taxes?]

What I have outlined would effectively raise the minimum tax from about 15 percent to somewhere in the low 20 percent range. As a result a future wealthy candidate running for president won't be embarrassed by paying what the public perceives to be an extraordinarily low effective tax rate.

The door to compromise is open. All our political leadership has to do is walk through it.

  • Read Eileen Appelbaum: Private Equity Firms Need New Rules for Managing Companies They Own
  • Read Keith Hall: Understanding the Magnitude of Our Economic Problem
  • Check out U.S. News Weekly: an insider's guide to politics and policy.