05/23/2011 08:48 pm ET Updated Jul 23, 2011

Tax Hikes Republicans Can Live With

A seemingly immutable law of today's politics is that Republicans in Congress have shifted so far right that they oppose all revenue increases -- no matter how urgent America's fiscal needs may be.

But perhaps this is no longer the case.

In March, I argued that Republicans would eventually go along with tax hikes and disguise their retreat by embedding revenue increases in a "tax reform" package -- allowing them to claim that they have taken an ax to America's tax system even they accept higher taxes.

This scenario is now looking more likely. The intense backlash to the House vote on Medicare has made it abundantly clear that big entitlement cuts will be too heavy of a political lift. But if Republicans don't make progress on deficit reduction -- a cause they only embrace when Democrats are in the White House -- they will face defections from independent voters and Tea Party supporters.

That's where tax reform comes in. Substantial new revenue can be raised by reducing or eliminating major tax breaks for individuals, including for home mortgage interest and retirement savings. Ditto for the corporate income tax, where it should be possible to raise new revenues by lowering tax rates somewhat while closing loopholes -- which is what Congress did in 1986 and what the President's fiscal commission has proposed doing today.

Such steps would command support from an unusual cast of characters. Many fiscal conservatives dislike offering a plethora of deductions in the tax code because it uses the tax system for "social engineering" and -- in regard to corporate taxes -- puts the government in the business of picking winners and losers. Meanwhile, progressives don't care for key individual tax breaks because they mainly benefit high earners. Also, of course, progressives hate the billions in tax breaks given to oil companies and other corporations.

All in all, it is possible to imagine a bipartisan deficit reduction deal in which large new revenues are raised by closing loopholes. That is clearly where some members of the Gang of Six (now five) have been for weeks. Last month, Republican Senator Tom Coburn said on Meet the Press that he would favor a "net" increase in revenue if it didn't raise tax rates.

It is even easier to imagine that scenario after a television appearance yesterday by Senate Minority Leader Mitch McConnell, who said that Republicans were dead set against higher tax rates. As reported by

Chris Wallace of Fox caught the distinction and asked McConnell if his language indicated he was open to collecting more tax revenue by ending some subsidies and loopholes. McConnell deflected the question, saying he wouldn't negotiate a deal on the program.

Maybe I'm naive, but that sounds like a clear signal that at least Senate Republicans would go along with a tax reform plan that raises revenue.

Of course, any deal that closes loopholes without reducing spending by an equal amount would violate the tax "pledge" that most Republicans have signed, and Grover Norquist has been working overtime to hold the line on this point, blasting Senator Coburn in particular. It may be no coincidence that Coburn dropped out of the Gang of Six last week.

Norquist is a powerful figure in the GOP, and the anti-tax Club for Growth has huge clout, too. But at the end of the day, if it comes down to raising taxes or sticking with a suicidal attack on entitlements, I'd bet on tax hikes.

A final point: It is worth noting that Paul Ryan's budget actually raises significant new revenue by closing loopholes and introducing a new value added tax. Ryan's budget cuts taxes overall because it lowers rates on affluent filers. But take away that reduction in rates, and the Ryan plan would bring in serious money by streamlining the tax code.

Republicans are famously good with language and the art of the big lie. If anybody can disguise a tax "hike" as tax "reform," it's Republicans. And that's what I expect them to do in coming months.