How Republicans can win the fiscal debate with a tactical retreat

In exchange for these concessions, the Republicans would limit the increase in the dividend tax rate to 20% in order to maintain its equivalence to the capital gains tax rate. There is significant support for taxing capital gains and dividends at the same rate among key Senate Democrats.

Next, taxpayers would be protected by making permanent the current death tax rate of 35% with a $5 million exemption, indexed for inflation. At least three key Democratic Senators have voiced their opposition to the President’s call for an increase in this tax.

The tax bill should also include permanent indexation of the Alternative Minimum Tax retroactive to January 1, 2012. Failure to adjust the AMT for inflation would impose an immediate $103 billion tax increase – mostly on the middle class. Making indexation permanent would remove the annual threat of such a tax increase and expunge from the budget this fictional source of future revenues.

Finally, the integrity of the Social Security system and its financial strength should be protected by allowing the temporary 2 percentage-point reduction in the Social Security payroll tax to lapse.