How the Democrats Blew It on Raising Taxes

As the ongoing budget battle further muddies the waters in Washington, one thing is becoming clear: Democrats may have botched their best shot at raising taxes.

Last year, as the fiscal-cliff threat loomed large, a cowed Republican Party capitulated and agreed to raise taxes on wealthier earners. In hindsight, the White House may have won the tax battle but lost the war.

The American Taxpayer Relief Act raised less than $600 billion in revenue over 10 years -- a relatively paltry sum given the nation's $845 billion deficit and an amount that does nothing to avert the $85 billion in budget cuts slated to go into effect next month. This is one reason deficit hawks Erskine Bowles and Alan Simpson described the revenue deal as "pitiful."

Now, the White House and Democratic lawmakers are back, telling Republicans to once again jettison their top economic priority and allow another tax increase to reduce the deficit. As President George W. Bush famously put it: "Can't get fooled again."

Republicans insist they are done raising taxes. House Speaker John Boehner said any changes -- even closing tax loopholes -- will be done to lower rates, not reduce the nation's deficit.

"Just last month, the president got his higher taxes on the wealthy, and he's already back for more," Boehner said in response to President Barack Obama's push on Tuesday to secure more tax revenue.

Senate Minority Leader Mitch McConnell, meanwhile, calls the tax issue "finished" and says any further deficit reduction most come from spending cuts from entitlement and other programs.

At the moment, it's hard to see either side capitulating before March 1, when $85 billion in across-the-board spending cuts kick in. In fact, some Republicans are now in favor of the so-called sequester, which imposes a total of $1.1 trillion in indiscriminate cuts over the next several years. Obama, meanwhile, continues to warn the cuts will wreak havoc on middle-class Americans, weaken the U.S. military, cause flight delays and drive up unemployment.

This time around, however, Democrats appear to have less leverage than they enjoyed last December as the fiscal cliff approached. The events would both have similar drags on economic growth yet Republicans seem less concerned this time around and less likely to budge on taxes. That posture could slip away as the budget cuts kick in and the public begins clamoring for a deal, but that's far from certain.

What is apparent is that Democrats had their best chance to eke out more revenue last year, when the fiscal cliff was looming large. Rather than simply raising taxes on those earning more than $450,000, the White House should have pushed for some of the things it wants: broader caps on tax expenditures, eliminating favorable treatment of carried interest and other so-called "revenue raisers" that increase receipts without raising tax rates. True, getting more revenue last December wouldn't have been easy, but it would have been a lot more doable than securing agreement this time around.

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