Schumer: Tax reform should raise rates

The third-ranking Democrat in the Senate on Tuesday called for an overhaul of the tax code that breaks with precedent and raises rates on the wealthy. 

Sen. Charles Schumer (D-N.Y.) noted that many of the reform plans that are under discussion in Washington would cut tax rates for everyone by eliminating or reducing deductions — the same model that was used during the last major rewrite of the tax code in 1986. 

“But in the upcoming talks on the fiscal cliff, we ought to scrap it,” Schumer said.

Schumer said the “best shot” for avoiding the tax increases and spending cuts that are set to take place once the "fiscal cliff" begins in January is the negotiations taking place between the bipartisan "Gang of Eight" in the Senate, but he urged those lawmakers to set aside the notion that tax reform should lead to lower rates for everyone.

“Our needs are different from 1986 and we cannot take the same approach we did then,” he said.

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Unlike in 1986, Schumer said, the government needs to raise revenue from tax reform to help reduce the deficit. On top of that, he said, income in the country has been redistributed to the top, which should be addressed with a tax code that is at least as progressive as it was in the 1990s. 

“This will come as heresy to some of those on the other side, who not only wish to extend the current rates in the upcoming lame duck, but also hope to cut rates even further in tax reform,” Schumer said during his speech at the National Press Club.

While stressing that taxes should not rise for people making less than $250,000 per year, Schumer said Democrats need to adopt three principles to guide them during negotiations on tax reform: that tax expenditures cherished by the middle class should be preserved while others are eliminated; that the top tax rate should be set near the 39.6 percent level it was at during the Clinton presidency; and that the capital gains taxes should be increased from today’s 15 percent rate to something closer to the rate for ordinary income.

The Democrat made clear that he was speaking for himself and not Senate Majority Leader Harry Reid (D-Nev.) or Senate Finance Committee Chairman Max Baucus (D-Mont.), though he said he discussed the principles with them and with the White House.  

“This is my idea, not theirs,” he said.

Republicans quickly blasted Schumer’s ideas.

“The default position of President’s party is our economy, debt and entitlement programs are just fine, and the only solution is to raise taxes on one of the most productive segments of our economy.  Glad they’ve made their opposition to reform clear to the American people,” said Senate Finance Ranking Member Orrin Hatch (R-Utah). “Fixing Washington  - from our broken tax code to our unsustainable entitlement programs – is essential to getting America back on track; it’s unfortunate that so many on the other side of the aisle fail to understand that.”
 
House Speaker John Boehner’s (R-Ohio) office painted Schumer as out on a limb.

“Sen. Schumer seems to be off on an island with these remarks,” said spokesman Kevin Smith.

“A tax reform framework that lowers rates and closes loopholes has support from both parties, including the Obama Administration, and it offers the best hope for bipartisan efforts to create robust economic growth and reduce our deficit,” he said.

“The American people know when Washington politicians call for higher taxes it is to fuel more Washington spending  (not deficit reduction).  Americans don't want to pay more in taxes to bailout Washington; they want tax reform that bails them out of the Obama economy," said Michelle Dimarob, spokeswoman for House Ways and Means Committee Chairman Dave Camp (R-Mich.).

Congress is expected to address the expiring rates in a lame-duck session after the elections, and might begin crafting a framework for tax reform in 2013. The details of that framework depend greatly on who wins the White House in November.

Republican presidential nominee Mitt Romney has proposed extending the George W. Bush-era tax rates and then lowering all taxes by 20 percent through a reform of the IRS code. His running mate, Rep. Paul Ryan (R-Wis.), has proposed a top rate of 25 percent, and congressional Republicans generally support lowering tax rates across the board by eliminating deductions.

President Obama says the Bush-era rates for the wealthy should be allowed to expire at the end of the year and has vowed to veto legislation that extends them. He has called for a tax reform process that reduces the deficit but has not rejected lowering the top tax rates through an overhaul. 

Schumer said that even if Republicans gain power in the election, they will have to accept that it's not possible to protect the middle class, lower taxes for the wealthy and still cut the deficit. 

The New York Democrat stressed that his party will not agree to a “shredding” of the safety net, though he said its open to billions in cuts to Medicare.

He would not specify how he would cut entitlements in a deal to avert the "fiscal cliff," but said savings can be achieved while "keeping the current benefit structure" in place. He added that he does not believe in raising the Medicare eligibility age, but did not take it off the table.

Schumer also said corporate tax reform should be revenue neutral and lower rates, a position held by the GOP and the Obama administration.

A Democratic aide said that Schumer's speech was "pretty clearly a strategic way to move the Democratic position to the left."

"It should not come as a surprise that for Democrats from the more liberal part of the party or Democrats in general do not think their first move should be to lower taxes for the wealthy," the aide said.

The aide said that Schumer is a powerful voice in the caucus and his speech will have an effect on tax reform talks, whether by the Gang of Eight or between Senate Finance Committee Chairman Max Baucus (D-Mont.) and House counterparts.

Baucus, on a trade mission to Europe, was not available for comment.

Last updated at 1:48 p.m.

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