Romney's Legacy: A Fiscal Cliff Deal

Could Mitt Romney ultimately be the architect of a fiscal cliff deal?

Crazy as it sounds, an idea Romney floated during his failed presidential campaign could provide a blueprint for President Barack Obama and Republicans as they attempt to negotiate a deficit-reduction compromise.

Romney's proposal to cap tax deductions like the mortgage interest tax break and tax credits at a certain amount provides a giant revenue boost to the U.S., particularly at the $17,000 limit Romney floated during one of the presidential debates.

Of course, Romney's idea was to limit the tax breaks to help pay for his 20 percent across-the-board tax cut. With that idea off the table, the rationale for limiting the tax expenditures still makes sense and could be embraced by Republicans, who appear ready to accept new revenues as long as they don't come from higher marginal tax rates.

Consider this: Capping tax deductions at $17,000 for everyone would boost the government's coffers by $1.75 trillion over 10 years -- far above the $1.5 trillion in new taxes Obama has called for as part of a deficit-reduction deal. That revenue jolt comes without raising marginal tax rates on the rich.

There's a catch, of course.

Capping tax deductions for everyone would raise taxes on more than just the wealthiest Americans. The rich would take the biggest hit, since the value of the tax breaks increases along with income. But about 25 percent of the tax increase would hit those with incomes between $112,000 and $228,000, and about 20 percent of the increase would hit those below $112,000, according to Tax Policy Center estimates.

That, of course, would fly in the face of Obama's oft-repeated promise not to raise taxes on anyone earning less than $200,000. Obama has offered his own version of a cap, proposing to limit the tax breaks for those in the upper tax brackets by treating them as if they were in the 28 percent bracket. For instance, a top earner who paid $10,000 in mortgage interest would reduce his tax bill by $2,800 rather than the $3,960 that would otherwise be allowed under Obama's tax plan.

The problem with Obama's proposal, however, is that it doesn't raise very much revenue: about $288 billion over the next decade, according to the Tax Policy Center.

"You can't solve your debts on the backs of the top 2 percent," said Roberton Williams, a senior fellow with the Tax Policy Center.

Put more bluntly, Obama will have to spread the pain.

Negotiations are just beginning, but there's no reason to believe Republicans will budge on their refusal to allow the Bush tax cuts to expire for those earning above $200,000. That leaves Obama with a $441 billion hole to fill.

The wealthiest Americans will certainly have to pay more but so, too, will the middle class. As the Congressional Budget Office detailed in stark terms last week, the U.S. faces the very real threat of recession, high unemployment and a fiscal crisis if it doesn't reduce its debt and deficit. There's no way to do that without reducing spending on entitlement programs and increasing taxes.

Limiting tax expenditures will hurt, since they convey a nice tax break that allows many Americans to afford to buy a home, among other things. But there's no way to avoid shared sacrifice given the nation's very real fiscal challenges. This is one reason why limiting -- or even eliminating -- tax expenditures has the support of several bipartisan deficit reduction committees.

As the Bloomberg View editorial board has said before, the fact that Romney and Obama agree, in principal, on the need to limit tax expenditures could provide the springboard for a fiscal deal. It will take compromise on both sides, but as Election Day proved, compromise is what voters expect.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

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