An issue that has taken center stage in the presidential campaign — how to rewrite the U.S. tax code — is rapidly moving back onto the front burner in Washington as policymakers brace for another epic battle over the budget days after the Nov. 6 election.
On Tuesday, Sen. Charles E. Schumer (N.Y.), the No. 3 Democrat in the Senate, rejected the goal of cutting the top tax rate, an objective embraced by both parties and considered a key piece of any deal to avert major tax increases and spending cuts set to take effect in January.
Meanwhile, a bipartisan group of senators gathered at Mount Vernon outside Washington for a three-day retreat aimed at producing an alternative debt-reduction strategy to replace the “fiscal cliff,” including a tax overhaul that reduces rates but raises more money.
At stake is not only the size of the tax burden on ordinary Americans but also the size of the economic mess that the next administration will inherit. Unless Congress can reach an agreement, tax bills will automatically increase for nearly 90 percent of Americans next year, slowing government borrowing but potentially inviting a new recession.
Republican nominee Mitt Romney wants to push the cliff off for another year to give lawmakers time to make far-reaching changes to social programs and the tax code, including reducing the rate paid by top earners from 35 percent to 28 percent. President Obama has proposed his own debt-reduction framework, which calls for spending cuts and significantly higher taxes on the nation’s wealthiest households.
The standoff cannot be resolved until voters determine who will occupy the White House. But after dominating Washington for much of the past two years, the policy debate over taxes is already being renewed.
In a speech at the National Press Club, Schumer said lowering the rate paid by top earners makes no sense in an age of rising income inequality and soaring debt. The speech took a direct jab at Romney, but its larger goal was to reset the parameters of the debate heading into the year-end battle.
“These promises of lower rates amount to little more than happy talk when the math behind them doesn’t add up,” he said. “It is an alluring prospect to cut taxes on the wealthiest people and somehow still reduce the deficit. But you can’t have your cake and eat it too.”
Many Democrats, including Obama, have embraced lower rates as a central tenet of tax reform. Last summer, in failed negotiations with House Speaker John A. Boehner (R-Ohio), Obama agreed that the top rate should be reduced from 35 percent.
On Tuesday, Schumer sought to upend the apparent consensus. He urged Democrats to “scrap” the old approach and demand higher rates — not only for the wealthy but also for investment income. Revenue raised by closing loopholes and deductions should be dedicated entirely to lowering deficits, he said, not to lowering rates — the GOP’s primary policy objective.
Senior Republicans quickly accused Schumer of sowing land mines on the path to compromise and inviting continued stalemate at the risk of economic calamity.
“Senior Democrats are now openly acknowledging their plan to hold the economy hostage to massive, job-killing tax hikes, and espousing the fiscally irresponsible view that says the country should be driven off the fiscal cliff,” Senate Minority Leader Mitch McConnell (R-Ky.) said in a written statement.
“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,” Kevin Smith, a spokesman for Boehner, said in an e-mail.
A White House official reacted favorably to the speech, however, noting that Schumer “is making the important point here that the wealthiest must pay their fair share in any balanced approach to reducing our deficit. . . . You can’t lower the rates for the richest like the Republicans are proposing to do without blowing a hole in our deficit or placing the burden squarely on the middle class.”
In addition to its policy implications, Schumer’s speech served as a reminder of the ugly work that awaits. Across Washington, lobbyists, think tank experts and officials at all levels of government are bracing for the year-end battle.
On Wednesday, local leaders are scheduled to be briefed on the potential fallout if Congress fails to act, including sharp reductions in the federal workforce. Aides on Capitol Hill and at the White House are beginning to shape strategies for the post-election legislative session in which current officeholders, including Obama, will determine whether the nation plunges over the cliff.
And at Mount Vernon, Sens. Mike Johanns (R-Neb.) and Michael F. Bennet (D-Colo.) joined five of the original members of the Senate’s Gang of Six: Republicans Tom Coburn (Okla.), Saxby Chambliss (Ga.) and Mike Crapo (Idaho) and Democrats Mark Warner (Va.) and Kent Conrad (N.D.), chairman of the Budget Committee. Sen. Richard J. Durbin (Ill.), the Senate’s No. 2 Democrat, joined by conference call, sources said.
The Gang of Six released a debt-reduction framework in July 2011, in the midst of the bruising debt-limit fight, that went nowhere. This week, an expanded “Gang of Eight” continued its work, along with Democrat Erskine Bowles and former Republican senator Alan K. Simpson of Wyoming, who led Obama’s 2010 fiscal commission.
People briefed on the talks say members realize they are likely to be on the outskirts of negotiations over the fiscal cliff, which probably will be resolved — or not — by Boehner and Obama. An agreement by the group could nudge a deal forward. But for now, “you can’t consider it anything more than preliminary,” said Stan Collender, a former Democratic budget staffer.
“It’s a chance to show they’re trying to do something. If [congressional] leadership isn’t going to provide any opportunity, they’re going to do it themselves.”
Many analysts view a broad agreement on the rules for rewriting the tax code as crucial to a deal. But Republicans and Democrats have been fighting for years over where to set the top two tax rates, which are paid by the richest 3 percent of households. Currently 33 percent and 35 percent, the rates will pop back up to 36 percent and 39.6 percent in January, when the George W. Bush-era tax cuts expire.
Republicans want to keep the top rates where they are through 2013 while rewriting the tax code to bring the top rate down to 28 percent, under Romney’s plan, or as little as 25 percent, under the budget prepared by his running mate, House Budget Committee Chairman Paul Ryan (R-Wis.).
Democrats, including Obama, want to let the top rate spring back up to 39.6 percent, but are generally open to lowering it as part of a broader tax code rewrite. Obama, for example, has proposed lowering the corporate tax rate from 35 percent to 28 percent.
Schumer acknowledged that lowering rates by closing loopholes has “a distinguished lineage.” It was the basis for the last major revision of the tax code in 1986 by President Ronald Reagan and a Democratic Congress. The Bowles-Simpson recommendations gave it new life.
But some Democrats worry that opening with an offer to lower the top rate will push the final number far lower than Democrats are willing to go. “Simpson-Bowles is a compromise, not the starting point,” said one House aide. In that regard, Schumer may be planting the Democratic flag at 39.6 percent not to thwart compromise but to encourage a deal closer to 35 percent than to the lower GOP targets.
Instead of lower rates, Schumer said, “the lure for Republicans to come to the table around a grand bargain should be the potential for serious entitlement reform” — including major changes to Medicare, the biggest driver of projected deficits. But Democrats have so far rejected structural changes to the program. On Tuesday, Schumer declined to say what new revisions Democrats were willing to contemplate.