It’s one of the few things that Democrats and Republicans seem to have agreed upon, at least in theory: Lower tax rates by broadening the base.
That’s what the Simpson-Bowles deficit commission originally recommended. The bipartisan Gang of Six has embraced the idea, and Mitt Romney says it’s how he’ll make his tax reform plan work. But Sen. Chuck Schumer (D-N.Y.) says it’s time to dump the idea as the framework for a deal on taxes and the looming fiscal cliff, arguing that it’s impossible to make it work without either burdening the middle-class or increasing the deficit.
“If upfront rate cuts are the starting point for negotiations on tax reform, it will box us in on what else we can achieve,” Schumer said in a speech Tuesday. “Certain conservatives will pocket the rate reductions and never follow through on finding enough revenue elsewhere in the code to reduce the deficit. Or, if they do, it will almost certainly come out of the pockets of middle-income earners.”
In other words, Schumer believes that “lowering rates by broadening the base” is too good to be true: There isn’t enough revenue to be had by closing loopholes and special-interest tax breaks if there are major rate cuts.
That’s the essential conundrum at the heart of Romney’s tax reform plan, as the Tax Policy Center has explained. And Schumer believes that Simpson Bowles shares the same weakness of increasing taxes on the middle-class. “It is an alluring prospect to cut rates on wealthy, reduce the deficit and hold the middle class harmless,” Schumer said. “The math dictates you can’t have it all.”
Instead, Schumer proposed that the Bush tax cuts for the highest earners should be permanently junked and the capital gains rate should go up to contribute to a bigger deficit reduction package that keeps tax rates on Americans with incomes below $250,000 from going up. He acknowledged that the tax hikes for wealthy Americans wouldn’t come close to raising enough revenue in the long term to bring down the deficit. As such, he proposes that the tax increases be paired with “serious entitlement reform,” though he declined to suggest any particular changes that Democrats would be willing to put on the table.
It would set back deficit reduction efforts because, by locking in a permanent lower top rate while not specifying how to secure tax-expenditure savings, it would leave the crucial trade-offs shrouded in mystery. When policymakers later see the cuts they will have to make in the mortgage interest, charitable, retirement, health care, and other popular deductions and exclusions to finance the rate cuts and reach whatever revenue targets they had set, they will likely balk at the tax-expenditure cuts and, as a result, the revenue target will give way.