It is extremely difficult for a conservative to support or even contemplate increasing revenue to the federal government.  Some take the easy route and simply say “no tax increase,” but that avoids an underlying problem.  The federal government has had low revenue for several years due to the economic downturn and temporary tax credits.  The current tax code (with temporary tax credits & cuts) is an insufficient source of revenue.  Conservatives must accept that the federal government, even a limited one, needs to be funded.

The Super Committee is within a few weeks of failing largely due to a disagreement on revenues.  Many conservative Republicans pledged not to agree to any tax increase, which makes it impossible to negotiate.  Others have indicated there is a nuance to their position, indicating they will support methods of increasing revenue without raising tax rates.  This could include eliminating tax loopholes.  However, some conservatives find this a violation of the pledge against new taxes.

It is time conservatives be realistic, if they want to limit government spending to 18 percent GDP and a balanced budget, they need a tax code that will collect 18 percent GDP in revenue.  The current code is inconsistent, at times collecting 20 percent while dropping to 14 percent during downturns.  The drop in revenue is a significant factor in the current deficit.  Conservatives should be looking for ways to increase revenue to a level where it will fully fund the limited government they envision.

Having said that, increasing tax rates is not the way to do it.  History has shown tax revenues are at their highest when the economy is expanding, not when rates are high.  In crafting tax policy, economic growth should be the priority not arbitrary notions of fairness.  The best pro-growth system would include a simpler tax code with lower rates.  It is counterintuitive but lower tax rates can increase revenues by virtue of the economic activity the cut stimulates.  However, not all tax cuts are equal in their economic impact.  For example, temporary tax cuts often have little or no impact because businesses make decisions based on long-term outlooks.

Another problem, the CBO and other economically ignorant research groups often calculate the “cost” of tax cuts assuming nothing else will change in the country or the economy.  The problem is no policy exists in a vacuum.  Tax and spending policies have a direct impact on the economy, often times within days of an agreement.

The Deficit Reduction Commission came up with an idea that lowered rates while increasing revenue.  Their proposal would eliminate nearly all tax loopholes, which would increase tax collection, then lowered the rates to compensate.  In the end, their proposal was a net increase in revenue of about $80 billion (tax loopholes > rate cuts).  There is also no way to accurately predict the economic benefits of a simpler, more efficient tax code.  The net revenue gain from the reform combined with new economic growth would push up tax revenues considerably.

Conservatives should not be afraid of this deal, even though it technically raises tax revenues.  Technically it also cuts tax rates, which is an easy sell.

If a deal is offered similar to the Deficit Reduction Commission plan, Republicans should consider it as long as the net revenue gain is not large (not a huge difference between closing of loopholes and the rate cutes).  The economic activity stimulated from the overall rate cuts will more than compensate.  However, any proposed increase in tax rates should be rejected on its face.

Unfortunately it appears Democrats have no interest in reaching a deal.  Their proposal includes a $1 trillion plus increase in taxes with $1 trillion in spending cuts.  This is not a compromise but the ideal Democratic plan.  Traditionally in a negotiation the two parties try to meet somewhere in the middle.  Sadly this is not how Democrats negotiate.  If this is the only deal on the table, Republicans should reject it.  The draconian $500 billion in defense cuts can be easily undone, possibly in the 2012 legislative session.  Republicans should not let themselves be cornered into making a bad deal.