A glimmer of hope to solve the budget crisis

Here’s the state of play on the fiscal-cliff-avoidance talks a month before the deadline: President Barack Obama and his Democratic allies insist on raising $1.6 trillion in new taxes, the bulk of which must come from higher tax rates on the rich. Republicans just as adamantly oppose higher rates.

It’s a classic standoff. Or so it would seem. Look more carefully, and important players on both sides appear willing to cede territory.

The latest salvo comes from billionaire investor Warren Buffett, whose Nov. 26 New York Times op-ed debunks the idea that the wealthy would simply quit investing if their taxes went up. It’s fair to say that Buffett’s experience confers authority on his argument: As a stockbroker in the 1950s, when marginal rates topped out at 91 percent (versus 35 percent today) and capital gains were taxed at 25 percent (versus 15 percent today), he made good money.

The Buffett contribution is his proposal to define the rich as households earning $500,000 or more, or twice Obama’s preferred cutoff. By raising the bar on what constitutes “rich,” Buffett seeks to close the gap between the no-tax-rate-increase Republicans and the president, who sees the tax code as a way to level the income-inequality scales.

The Buffett compromise builds on the Republican proposal to close loopholes and cap tax expenditures, such as mortgage interest and charitable contributions, as an alternative to higher rates. In addition, there appears to be a growing willingness to entertain higher taxes on investment income, including taxing capital gains at 28 percent and dividends at ordinary income-tax rates, and to close the carried-interest loophole that allows private-equity and hedge-fund managers to pay taxes of just 15 percent.

Add it all up, and one can see the makings of a deal: The Bush tax cuts would end for those earning more than $500,000 – about 760,000 households. Marginal rates would rise from 33 percent and 35 percent to 36 percent and 39.6 percent, respectively – the same as under President Bill Clinton.

Capital gains and dividends would be taxed at higher rates, no less than 20 percent. Low investment taxes overwhelmingly benefit the wealthiest Americans, with 96 percent of the tax savings going to the top income quintile, according to the Tax Policy Center. Tax deductions would also be capped between $25,000 and $50,000, depending on the remaining revenue hole.

Where does this get us? According to the Congressional Research Service, allowing the Bush tax cuts to expire on earnings exceeding $500,000, combined with 20 percent capital- gains and dividend taxes, would yield about $566 billion over 10 years, or 72 percent of the revenue gain from Obama’s plan to raise taxes on those with incomes of more than $250,000. Capping deductions between $25,000 and $50,000 would bring in between $1.2 trillion and $749 billion, respectively. That puts negotiators well within Obama’s $1.6 trillion ballpark.

Both parties say they understand that averting the fiscal cliff will require compromise; now they need to understand that the outlines of that compromise are within reach.

Bloomberg News