Three policy tests for Obama if he's serious about compromise

The obvious trade is a down payment on entitlement reform. House Budget Chairman Paul Ryan has proposals at the ready, some of them from Mr. Obama’s own budget. They include means-testing benefits for the affluent, raising the retirement age for Medicare, improving the inflation index for calculating Social Security, and changing the incentives for first-dollar coverage on Medigap policies.

Far more needs to be done to address America’s long-term entitlement problem, but these reforms are better than nothing. If Mr. Obama won’t go even this far and still insists on a tax increase, Republicans should tell him to live with the sequester and call again after the 2014 election.

Tax reform is a harder negotiation, but here too the main obstacle is Mr. Obama’s demand for additional revenue. The way out is to negotiate a revenue-neutral reform that lowers rates in return for closing loopholes, which will lead to faster growth that will in turn produce more revenues. Democrats can get their new revenue, but only by growing the economy. This worked for Bill Clinton in his second term after he agreed to cut the capital-gains tax in 1997.

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