Tax Analysts Blog

Schumer's Reality Check

Posted on Oct 10, 2012

We've heard it many times before: a group of Senators--this time the Gang of Eight meeting in Mt. Vernon, Virginia--are negotiating a "grand bargain" deficit reduction plan. Unless they've got something new up their sleeves, this plan will probably include spending cuts of about $3 trillion and tax increases of about $1 trillion (over 10 years) with a big helping of tax reform on the side.

Meanwhile inside the Beltway the No. 3 Senate Democrat Chuck Schumer of New York gave a speech at the National Press Club arguing that we should allow the return of Clinton-era tax rates for incomes over $250,000. And just to twist the knife into conservative ideology, he added that we should eliminate the preferential rate on capital gains. Republicans are howling that he is upsetting current negotiations, adding fuel to the Obama campaign's dwindling fire, and pre-positioning Democrats further to the left for future negotiations.

All that may be true, but no matter what your politics, you must acknowledge that tax reform--always a difficult task-- will be nearly impossible if it does not start with the trillion or so in revenue from axing Bush tax cuts for the rich--especially if the charitable and mortgage interest deductions for the middle class are off limits as Romney said yesterday. In case you think this is a radical view, you must understand that this is exactly what the Bowles-Simpson plan did.

As for capital gains, if as Romney claims, he wants to maintain distributional neutrality with his rate cuts, this will be nearly impossible to do without raising the capital gains rate, as explained in a prior post. Again, this is not a wild idea. It is part of the Bowles-Simpson plan and it was necessary for Ronald Reagan in 1986.

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