2012-11-09 – Romney’s tax plan could be a way to avoid the fiscal cliff.

Are you surprised I would say that? Well, I don’t mean it in the way he thought. His numbers never added up and never will.

But he talked about deduction reform as a source of revenue. And while it’s not five or seven trillion dollars’ worth, the idea is worth something. Here’s the idea: cap deductions. Start there. And the key deduction to cap is capital gains.

Obama spoke of keeping most of the Bush-era tax rates, but asking a little more from the enormously wealthy. Republicans say, no way. Keep the tax rates the same or reduce them . . . but we’re willing to talk about deduction reform.

Are they?

Because capping the capital gains deduction is a way to make some of the rich pay more without raising the general rates. Capital gains reform wouldn’t impact small business because small business earnings are ordinary income. This is a way to keep favorable rates for “job creators” and ask a little more from the one-per enters all at the same time.

Is this too easy? Who would be hit by a change in the way capital gains are taxed?

The tax on capital gains is incurred when you sell an investment for a gain. It does not apply to income you earn working or for income you earn selling goods or services. It does not apply to investments that you hold. It only applies when you sell the investment. And it doesn’t apply to the total dollar amount you get when you sell; it only applies to the gain.

People who work for a living don’t have capital gains, even at the high end. That’s not what capital gains are about. This tax doesn’t hit the middle class at all — except when investments are liquidate for major life events, like paying for college, buying a house, retirement, or similar things.

But this is easy to deal with. Keep favorable treatment for capital gains below, say, $100,000 per year (or pick some other number). We already do something like this to protect gains on the sale of a home, so the concept is not unheard of.

And voila! The very rich will be paying more. Overall tax rates could remain as they are. The middle class will be protected and so will the small business job creators.

Would the Republicans go for it?

It would be a test. If they are truly for small business, it would be a perfect compromise. But if they are just shills for billionaires (“shillionaires”) —and they could be, considering who funds their super-PACs — they’ll dig in their heels. It would be interesting to find out.