Senator prods Gang of 8 to make middle class, deficit-cutting top priorities

As bipartisan talks to avoid a 'fiscal cliff' renew this week, a top Senate Democratic leader, Charles Schumer, warns negotiators that any plan that aims to cut taxes on the rich and also cut deficits is 'a trap,' and won't add up.

If you want to fix America’s tax code, one of the Senate’s leading Democrats argued forcefully on Tuesday, Congress needs to face one stark reality: “You can’t have it all.”

That includes the so-called "Gang of Eight" senators, four Democrats and four Republicans, who are meeting down the river at Mount Vernon to come up with a tax-reform plan that could pass muster in a lame-duck session of Congress, averting a plunge off the "fiscal cliff" at the start of 2013.

"Leaders on both sides are actively encouraging their talks. I certainly am," Sen. Charles Schumer (D) of New York told reporters. "But I hope they can revisit their approach to tax reform."

Commenting on three widely repeated goals of tax reform – cutting top income-tax rates, reducing the federal deficit, and protecting the middle class from tax hikes set to take hold in 2013 – Senator Schumer said that all three cannot be achieved at once. 

“Anyone pushing a plan purporting to accomplish all three isn’t telling the truth,” Schumer said. “The sooner we are honest with ourselves about this, the easier it will be to negotiate a compromise on taxes.”

That flies in the face of cozy, conventional talking points in Washington, where members of both parties publicly ache for a tax accord that “broadens the base and lowers the rates.” 

But that Washington tax-reform shorthand – and the memory some lawmakers have of the 1986 tax reforms – ignores both a fundamental change in the state of the nation's finances and the growing income inequality, Schumer said.  

When President Ronald Reagan and House Speaker "Tip" O’Neill (D) of Massachusetts achieved tax reform, which many in Washington have taken as a blueprint for current tax negotiations, the outcome was to cut top rates and shield the middle class but ignore the deficit, said Schumer, who not only voted for the measure but whipped his then-House colleagues to favor it as well.

Today, Schumer said, reforms can, at most, achieve two of the three stated goals, especially when taking into account which income groups actually benefit from preferences in the tax code.

With US debt more than doubled as a percentage of gross domestic product (GDP) compared with the mid-1980s, it is impossible to leave deficit reduction out of the picture, he said.  

Likewise, he continued, statistics showing yawning growth in income inequality over the past several decades signal a need to protect middle-class Americans.

And that leaves reducing the highest tax rates out in the cold.

So how would Schumer obtain his starting point of $1.5 trillion in higher government revenues over the next decade?

First, some tax expenditures that don’t benefit middle-class Americans will be cut. Next, Schumer said the Bush tax cuts for annual incomes over $250,000 for families (currently taxed at 35 percent) should be “somewhere” near their levels during President Bill Clinton’s day (when they were 39.6 percent). Last, Schumer said the disparity between tax rates for earned income and investment income (currently taxed at 15 percent) should be narrowed.

Republicans, including presidential nominee Mitt Romney, have long sought a “revenue neutral” tax reform plan that lowers rates and eliminates deductions but that does not increase the amount of money taken in by the federal government. So why would they sign on for Schumer’s plan?

In short, entitlement reform. While Schumer said he would not offer specific changes to the Democratic totems of Medicare and Social Security – and although he criticized Republicans for not being specific in saying which tax preferences they would eliminate in their own plans – he said time and again that his goal was to cut a deal and that, when the time came, Democrats would be more than willing to do so.

“Make no mistake about it, Democrats are willing to do serious entitlement reform providing we keep the safety net,” Schumer said. “There’s going to be tough medicine, [and] we’re willing to swallow it.”

That political tangle – wrangling entitlement reform from Democrats, higher taxes from Republicans – has been the snare holding back a resolution to the more than $600 billion in higher taxes and lower government spending set to hit the US economy come Jan. 1.

As recently as last month, Schumer joined with 28 other Senate Democrats in pledging to reject any changes to Social Security, as part of a deficit-reduction plan. But on Tuesday, he said that he would put nothing out of bounds. 

"I'm not taking anything off the table," he said.

Meanwhile, a group of eight senators led by Mark Warner (D) of Virginia has been working to build a bipartisan deal for nearly two years along just such lines. These include Sens. Richard Durbin (D) of Illinois, the deputy majority leader; Michael Bennet (D) of Colorado; and retiring Sen. Kent Conrad (D) of North Dakota; along with Republican Sens. Saxby Chambliss of Georgia, Tom Coburn of Oklahoma, Mike Crapo of Idaho, and Mike Johanns of Nebraska.

Pressure on Congress to get a deal is mounting not only from businesses and consumers unsure of Washington's taxing and spending priorities come Jan. 1, but also from international economic groups, as well. The International Monetary Fund on Tuesday scaled back its estimates for the growth of the world economy to 3.3 percent, down from 3.5 percent in July, adding that if the US fails to deal with its "fiscal cliff," the risk of falling back into recession will be even greater.

With the clock ticking down to year's end, Schumer said he has discussed his views with the bipartisan debt group long before.

But while he believes Congress can come to an agreement during the lame-duck period after the November election, he aired his theory publicly to emphasize what he sees as the fundamental intellectual turning point to getting past the impasse that has blocked a deal thus far.

Negotiators have to realize, Schumer said, that there’s no unicorn.

“These promises of lower rates amount to little more than happy talk when the math behind them doesn’t add up,” Schumer said.

Later, he added: “This is the trap of tax reform, and we must not fall for it. It is an alluring prospect to cut taxes on the wealthiest people, reduce the deficit, and hold the middle class harmless, but the math dictates you can’t have it all.”