Sometimes you have to walk through the desert to get to the Promised Land. That's the way it is for Republicans right now. The Republicans are stuck in a miserable position at the end of 2012, but, if they handle things right, they can make 2013 an excellent year — both for their revival prospects and for the country.
First, they have to acknowledge how badly things are stacked against them. Polls show that large majorities of Americans are inclined to blame Republicans if the country goes off the "fiscal cliff." The business community, which needs a deal to boost confidence, will turn against them. The national security types and the defense contractors, who hate the prospect of sequestration, will turn against them.
Moreover a budget stalemate on these terms will confirm every bad Republican stereotype. Republicans will be raising middle-class taxes in order to serve the rich — shafting Sam's Club to benefit the country club. If Republicans do this, they might as well get Mitt Romney's "47 percent" comments printed on T-shirts and wear them for the rest of their lives.
So Republicans have to realize that they are going to cave on tax rates. The only question is what they get in return. What they should demand is this: That the year 2013 will be spent putting together a pro-growth tax and entitlement reform package that will put this country on a sound financial footing through 2040.
Republicans should go to the White House and say they are willing to see top tax rates go up to 36 percent or 37 percent and they are willing to forgo a debt-ceiling fight for this year.
This is a big political concession, but it's not much of an economic one. President Barack Obama needs rate increases to show the liberals he has won a "victory," but the fact is that raising revenue by raising rates is not that much worse for the economy than raising revenue by closing loopholes, which Republicans have already conceded.
In return, Republicans should also ask for some medium-size entitlement cuts as part of the fiscal cliff down payment. These could fit within the framework Speaker John Boehner sketched out Monday afternoon: chaining Social Security cost-of-living increases to price inflation and increasing the Medicare Part B premium to 35 percent of costs.
But the big demand would be this: That on March 15, 2013, both parties would introduce leader-endorsed tax and entitlement reform bills in Congress that would bring the debt down to 60 percent of GDP by 2024 and 40 percent by 2037, as scored by the Congressional Budget Office. Those bills would work their way through the normal legislative process, as the Constitution intended. If a grand bargain is not reached by Dec. 15, 2013, then there would be automatic defense and entitlement cuts and automatic tax increases.
Both parties say they are earnest about fundamental tax and entitlement reform. This deal would force them to think beyond the 10-year budget window and put credible plans on the table to address the long-term budget problems while there is still time. No more waiting for the other guy to go public with something serious. The ensuing debate would force voters to face the elemental truth — that they can only have a government as big as they are willing to pay for. It would force elected officials to find a long-term pro-growth solution as big as Simpson-Bowles.