N.Y. Sen. Chuck Schumer outlines Democrat’s deal to avoid ‘fiscal cliff’
Addressing the National Press Club on Tuesday, Sen. Chuck Schumer (D-N.Y.) outlined the Democrat’s deficit reduction deal to avoid the ‘fiscal cliff’ of tax increases and steep budget cuts set to kick in on Jan. 1, 2013.
While spending cuts have dominated the deficit debates, the New York Senator made it clear that any deficit deal with the Democrats must address the chronic revenue shortfalls created by the Bush-era tax cuts for the top income bracket.
“So we have a revenue problem. We need tax reform to solve it,” said Schumer.
In exchange, Schumer said Democrats are willing to engage with Republicans in “serious” entitlement reforms, including reducing Medicare costs by hundreds of billions of dollars while preserving its guarantee to seniors.
“That’s how a grand bargain can be had. Republicans get entitlement reforms, Democrats get revenues from the higher-income people,” said Schumer.
Schumer’s proposal focused on how tax reforms could bring in revenues to help pay down the deficit and reduce the tax rates of middle-income earners.
He criticized the Republican’s plan to simply cut tax rates – particularly for the top income brackets – by wiping out the credits and deductions that benefit the middle-class. The GOP’s plan, Schumer warned, would actually end up raising taxes on middle-income earners while the top 2% would enjoy a hefty tax break.
While he agreed that certain tax expenditures should be eliminated, Schumer said not all of the revenues generated from broadening the tax base should go towards reducing tax rates as Republicans have insisted. Schumer argued that some of the revenues generated from eliminating some tax credits and deductions should be used to help pay down the deficit and lower the tax rates of middle-class earners instead of giving millionaires another round of tax cuts.
“It would be a huge mistake to take the dollars gained from closing loopholes and put them into reducing rates for the highest income brackets rather than into reducing the deficit,” said Schumer. “We must reduce the deficit, which is strangling our economic growth in the long-term. And we must seek to control the rise in income inequality, which is hollowing out the middle-class.”
Schumer proposed the following reforms to the tax code:
#1 Eliminate unnecessary tax loopholes but keep certain tax deductions and credits that help the middle-class.
Schumer listed the following tax deductions and credits that would be retained under the Democrat’s plan:
- Mortgage interest rate deduction
- Charitable deduction
- State and local property tax deduction
- Tax preferences for college education and retirement savings
“We realized that as much as we wanted to make the code more efficient, these provisions were too essential to middle-class households,” said Schumer. “They were put in the code on purpose to make a middle-class lifestyle accessible and sustainable for American families.”
#2 Let the Bush-era tax cuts expire for the top income bracket but extend them for individual earning less than $200,000 a year or families with incomes less than $250,000 a year.
“The tax rate for the highest earners should probably return to Clinton-era levels and stay somewhere around there,” said Schumer. “Recent experience, of course, suggest that we have nothing at all to fear in a return to the Clinton year rates on the wealthiest Americans…By contrast, as we all know, the decade shaped by Bush tax breaks squandered our budget surpluses, produced net negative jobs, and culminated in a Great Recession.”
#3 Tax capital gains and investment income at a similar rate as ordinary earned income.
The Bush tax cuts capped the capital gains rate at 15%. This has allowed wealthy individuals, like Mitt Romney, to pay a considerably lower tax rate on their incomes than most middle-class families who earn wages through work. In fact, because Romney’s incomes are mostly derived from investments, he has been able to pay less than 15% despite pulling in tens of millions of dollars every year.
“The reduction of the capital gains rate to 15% under President Bush was a major contributor the growth in wealth disparity we see here today,” said Schumer. “Without question, we need a narrower differential between earned and unearned income than we have today. That will bring more fairness to the code.”
Schumer suggested that capital gains should revert to the Reagan-era rate of about 28%.
“These three principles – curtailing tax expenditures, returning to a Clinton-era top rate, and reducing but not eliminating the tax preference for investment income – provide a foundation for a tax reform plan that would reduce the deficit without hurting the middle-class,” said Schumer.
- WhatTheFolly.com: Transcript: Sen. Chuck Schumer’s remarks on avoiding the fiscal cliff at the National Press Club
- WhatTheFolly.com: CBO report shows extending Bush tax cuts will raise deficit
- WhatTheFolly.com: Romney’s tax controversy shines spotlight on tax code that favors wealth over wages
- WhatTheFolly.com: America’s growing income inequality
- WhatTheFolly.com: How the 2001 and 2003 Bush tax cuts benefit the wealthy
- WhatTheFolly.com: Analysis: Romney paid 14.1% effective tax rate in 2011
- WhatTheFolly.com: Analysis: Romney’s tax plan would shift tax burden to middle and lower-income Americans
- WhatTheFolly.com: Republican National Convention 2012: Platform Committee voted against preserving the mortgage interest tax deduction
- WhatTheFolly.com: CBO analysis shows ‘fiscal cliff’ will sharply reduce long-term deficits but lead to a recession in 2013
- WhatTheFolly.com: House GOP rejects Senate tax cut extension bill
- WhatTheFolly.com: Senate Democrats pass middle-class tax cut
- WhatTheFolly.com: Transcript: Sen. Patty Murray challenges Republicans on ‘balanced approach’ to avoid fiscal cliff
- WhatTheFolly.com: Obama presses Congress to extend middle-class tax cuts
- WhatTheFolly.com: Senate Finance Committee Chair Max Baucus says tax reform is needed to bring down deficit
- WhatTheFolly.com: CBO warns of approaching ‘fiscal cliff’
- WhatTheFolly.com: 5 key facts about sequestration