Chuck Schumer: Democrats have tax reform all wrong

October 20, 2012

Sen. Chuck Schumer (D-N.Y.) is the Senate Democrats' third-in-command, and widely acknowledged as the party's top political tactician in the Senate. He's also a bit shocked that his colleagues have, as he sees it, allowed themselves to get snookered into a vision of tax reform that begins with lowering rates. On Tuesday, he gave a speech trying to talk them out of it.We spoke on Friday about his position. A lightly edited transcript of our conversation follows.

Ezra Klein: The core of your argument is that tax reform in 2012 is proceeding atop a mistaken analogy to tax reform in 1986. So why isn’t 2012 like 1986?

Chuck Schumer: It’s not like 1986 for two reasons. First, in 1986, we didn’t have a deficit. The two greatest problems we face are declining middle-class incomes and huge deficits. Neither existed in 1986. The old model of tax reform doesn’t deal with either of those problems. It was revenue-neutral, so no new revenues, and, while it was slightly progressive, that was not its intent. So if your goal is to reduce the deficit, you can’t really use the old model.


Ricky Carioti/THE WASHINGTON POST

EK: So why is the 1986 model so popular today?

CS: The reason, I think, is a longing for anything that looks bipartisan. Republicans have not been willing to raise revenues outright. So they’ve hidden by calling for tax reform. Tax reform has allowed us to duck the issue of revenues for too long.

EK: I want to go back to something you said a moment ago: that our two biggest problems are median wages and deficits. I know a lot of folks who would say our two biggest problems are jobs and jobs. And as for deficits, real interest rates are negative. The market is begging us to take their money. This focus on deficits, these folks argue, is hugely damaging. We need to be spending our time and political will on jobs.

CS: Here’s what I tell my more liberal colleagues: We’re like a blindfolded man walking towards a cliff. If we keep walking in that direction, we’ll fall off, like other countries have fallen off. You can argue whether we’re 500 yards or 5,000 yards from the cliff, but it’s unsustainable. And it also gets away from helping the middle class, as the deficits mean we don’t have the money to pay for some of the things like education and scientific research that expand middle-class incomes.

So I don’t agree. I don’t think the deficit is our only problem. But it’s number two, and it’s real.

EK: One thread in your speech is the idea that there’s really no way to construct a tax reform process such that you can confidently promise low rates and higher revenues at the beginning and be sure that that’s what you’ll get at the end. Your view, as I understand it, is that Republicans will likely just pocket the lower rates and then do everything they can to stop the new revenues.

CS: When Republicans say the first thing you do when you do deficit reduction is reduce rates, it would be like Democrats saying the first thing you do when you do deficit reduction is provide free Medicare at age 55. We’d like to do that! But it won’t bring the deficit down. That’s for sure.

It just makes no sense and I’m surprised so many have swallowed it for so long. If your number one goal is deficit reduction, you don’t start out by lowering the rates. You don’t need a PhD in economics to understand that.

EK: A lot of tax reform advocates see cleaning up the code as the key goal in and of itself. In this telling, making the tax system less complex would be good for growth, good for the deficit, good for the country -- even if it doesn’t raise much revenue. Your speech is relatively dismissive of the tax reform for tax reform’s sake idea. Putting aside the revenue question, why?

CS: First, people have conflated loophole with tax expenditure. There are some tax expenditures that are there for very obvious and very important and very good policy reasons. Whether it’s the charitable deduction or the deduction for homes, it’s not a loophole. It’s a policy judgment we’ve made, even if you disagree with it. And most of these expenditures are of the policy variety. If you want to take those away, it’s a policy argument. 

Second, I think the goal of many on the right is not really cleaning up the code but getting that top rate lower. You can’t have it both ways. You can’t get the top rate significantly lower and get deficit reduction without clobbering the middle class -- and doing it at a time when middle-class incomes are declining. 

EK: My understanding is that you can if you go after the lower rates for capital gains and other forms of investment income, as Simpson-Bowles does, but you can’t if you exempt those breaks, as Romney does.

CS: It’s even hard to get progressivity if you do that and you want to lower the rates. But let me make a few points. I do believe there should be a distinction when someone spends on investment rather than consumption. As I said, my philosophy is it’s not wrong to use the tax code for policy purposes. Second, if you raise it too high, you can lose revenues. The Joint Tax Committee said if you raised the rate to 39 percent you’d lose revenue because people would stop making some of those investments. So I think it needs to be somewhere in the middle.

EK: Tax experts will tell you, though, that we’re hitting the outer limit of how much pressure we can put on the income tax code, even if you’re just talking about the rich. If you believe that the retirement of the baby boomers means federal spending will rise, then we really need to be looking at adding something like a consumption tax or a carbon tax so we don’t have huge economic drag from the income tax.

CS: I do think there’s a limit.  And that, by the way, is another difference between what we’re saying and what happened in 1986. The top rate was 50 percent then. It was too high. 

To introduce a whole new tax regime, that would be modern tax reform. But that’s too big a task. I take seriously the idea that in addition to revenues, we need to cut back on costs, and we can do a lot more of that in ways that keep the basic structure of Medicare and Medicaid but save a lot of money.

EK: You bring up spending cuts. One frustration I have with the discussion is you only ever hear about progressivity and regressivity on the tax side. But if we manage to do revenue-neutral tax reform that holds the burden on the top 1 percent constant, as Romney says he wants to do, and then reduce the deficit by cutting Medicaid and food stamps, we haven’t spread the sacrifice. We’ve reduced the deficit in an incredibly regressive way.

CS: The greatest opportunity for progressivity is on the revenue side. That’s why I think keeping that top rate at 39 percent is important. It’s not just for the revenues, but because when you make cuts to spending, they fall on the middle class and the poor.

EK: So when we do get nearer to the fiscal cliff, what’s an approach you could see working?

CS: I think it’s the revenue side that’s kept us to coming to an agreement. When the two sides sit down, we keep breaking apart over the revenue agreement. 

So what would make Republicans change on the revenue side? Two things. First, if we win the election, it will be a vindication of our policy on the revenue side. For the first time in 30 years, were winning the tax debate by deliberately and emphatically separating tax policy on the wealthy and tax policy on the middle class. Today, you ask people who they prefer on taxes, and voters say Democrats. It used to be lopsided for Republicans.

Then there’s what happens if we don’t come to the table. Tax increases, sequestration, a lot of things Republicans care about get hit. 

Third, there  are two types of Republicans now. There really aren’t moderates. But there are mainstream conservatives who know they need to compromise to get their goals. If, after Romney embraces Ryan and his hard-right philosophy, we end up 52-48 in the Senate and pick up a few seats in the House and win the White House, it strengthens the hand of the mainstream conservatives.

EK: But more specifically on process. You guys won’t be able to get everything done in the lame-duck. So how do you build the tax reform process, however it ends up working, in such a way that you can trust it?

CS: The more detail the better. You can’t just say we’ll raise this amount of revenues and keep distribution the same. You need some real detail here. You need to lock in what the rates will be. If you need $1.5 to $1.8 trillion in revenues, you can gain about a trillion dollars from raising the top rate and having the estate tax go up, and you’ll be able to find another $500 billion on the expenditure side That you could get from high-income people. So we need that level of detail. You can’t fudge it.

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