SCHUMER CALLS FOR
‘SCRAPPING’ REAGAN-STYLE TAX REFORM MODEL USED BY SIMPSON-BOWLES
October 10, 2012
In a speech Tuesday
at the National Press Club, U.S. Senator Charles E. Schumer (D-NY) said
federal policymakers eyeing an overhaul of the U.S. tax code in the
coming months should abandon President Reagan’s model of tax reform that
calls for reducing rates for the wealthiest Americans.
The 1986 model—which seeks to eliminate tax credits and deductions in
order to pay for across-the-board rate cuts—is the basis for both the
Simpson-Bowles framework and the outline released last year by the
so-called “Gang of Six.”
Breaking with those proposals, Schumer called for applying 100 percent
of the savings from loophole closures towards deficit reduction, rather
than a reduction in the top rate for the wealthiest Americans.
“Tax reform 25 years ago was revenue-neutral. It did not strive to cut
the debt. Today, we can’t afford for it not to,” Schumer said. “It would
be a huge mistake to take the dollars we gain from closing loopholes and
put them into reducing rates for the highest income brackets, rather
than into reducing the deficit.”
As a House member in 1986, Schumer voted for the landmark tax agreement
negotiated by President Reagan and congressional Democrats. But he said
upfront rate cuts this time around would make it impossible to reduce
the deficit without increasing the tax burden on middle-income earners.
“A 1986-style approach that promises upfront rate cuts to the wealthy is
almost guaranteed to give middle-income earners the short end of the
stick,” Schumer said. “The reason is, in order to raise enough money to
both reduce tax rates and cut the deficit, you would need to slash
deductions and credits on a far greater scale than we ever did in 1986.
Middle-income earners would not be spared.”
Schumer pointed out that it was a contradiction for some in his party to
oppose a lower rate for top earners in the debate over extending the
Bush tax cuts, but then endorse the same concept when it is dubbed “tax
Instead of luring Republicans to the table on a grand bargain with the
promise of lower tax rates for the wealthy, Schumer said Democrats
should be prepared to offer to make significant reforms to entitlements.
A copy of Schumer’s remarks, as prepared for delivery, appears below.
Remarks by U.S. Senator Charles E. Schumer on Tax Reform
National Press Club
October 9, 2012
As Prepared for Delivery
is perhaps no issue facing Congress that is more complex than tax
reform. But for all the disagreement on taxes, ask most
policymakers—Democrats, Republicans and independents alike—what the
broad outlines of tax reform might look like, and you get a startlingly
consistent answer: dramatically lower the rates, and broaden the tax
base by getting rid of loopholes in the tax code.
This approach has a distinguished lineage: Ronald Reagan and the 1986
Democratic Congress invented it. Simpson-Bowles validated it. The Gang
of Six endorsed it.
But in the upcoming talks on the fiscal cliff, we ought to scrap it.
The reason is simple. The old style of tax reform is obsolete in a 2012
world. It just doesn’t fit the times because there are two new
conditions that didn’t exist in 1986, but that are staring us in the
face today: a much larger, more dangerous deficit, and a dramatic
increase in income inequality. Old-style tax reform could make both
Now, I do not dismiss the old framework lightly. The credit for the 1986
tax reform law belongs to Democrats like Bill Bradley in the Senate and
Dick Gephardt in the House just as much as President Reagan. As a member
of the House back then, I not only voted for it, I whipped votes to make
sure it passed.
The approach made a good deal of sense at that time. Then, as now, the
code was littered with egregious loopholes that needed to be reformed.
Recall, for example, the so-called “passive loss” rules in place back
then. They allowed wealthy taxpayers to legally game the system. Someone
could invest in a bowling alley and then, if the bowling alley lost
money, take a write-off many times larger than their initial investment
and wipe out their entire income tax liability. We needed to get rid of
such gimmicky tax shelters.
Pruning these loopholes allowed us, in turn, to cut rates. At the time,
that made sense, too. While it is critically important to ensure
everyone, especially those at the very top, pays their fair share, a 50
percent top tax rate—which is what we had up until 1986—was admittedly
So yes, Reagan-style tax reform worked over 25 years ago. As a result,
it has a great deal of appeal to some of the most serious fiscal
thinkers in Washington.
This includes the Gang of Six—recently expanded to a Gang of Eight—which
last year published a white paper based largely on the 1986 model. Let
me say this about the Gang of Eight. Some of them are among my best
friends in the Senate. Leaders on both sides are actively encouraging
their talks. I certainly am.
But I hope they can revisit their approach to tax reform.
Our needs today are different compared to 1986, and we cannot take the
same approach we did then. We must reduce the deficit, which is
strangling our economic growth. And we must seek to control the rise in
income inequality, which is hollowing out the middle class. The 1986
model would be ineffective—if not counterproductive—to solving these two
Let me explain why.
First, with regard to deficit reduction: Tax reform 25 years ago was
revenue-neutral. It did not strive to cut the debt. Today, we can’t
afford for it not to. Our national debt today is approximately 73
percent of GDP—that’s nearly double what it was in 1986.
It would be a huge mistake to take the dollars we gain from closing
loopholes and put them into reducing rates for the highest income
brackets, rather than into reducing the deficit.
To fix the deficit, we of course need to cut spending. The Budget
Control Act made a down payment of $900 billion in domestic
discretionary cuts. On top of that, most Democrats are committed to
finding significantly more savings as part of a grand bargain, including
through reforms to entitlements.
But in addition to more cuts, we also need to bring in more money. The
President’s budget has called for around $1.5 trillion or so in revenues
over the next decade.
The revenues side of the federal ledger is underperforming by historical
standards. For three straight years, we’ve had revenues coming into the
federal government at a level of around 15 percent of GDP. That’s a
60-year low. Since 1960, we’ve never had a balanced budget in a year
when revenues were less than 18 percent of GDP. In 2001, the last year
we had a surplus, revenues were at 19.5 percent of GDP.
So we have a revenue problem. We need tax reform to help solve it.
Some on the left have suggested corporate tax reform could be a source
for new revenue, but I disagree. To preserve our international
competitiveness, it is imperative that we seek to reduce the corporate
tax rate from 35 percent and do it on a revenue-neutral basis. This will
boost growth and encourage more companies to reinvest in the United
Corporate tax reform, under the leadership of Chairman Baucus and
Senator Hatch on the Finance Committee, should be treated separately
from our attempt to get a handle on the deficit.
But when it comes to the individual side of the code, our approach must
In this part of reform, the new money we collect through broadening the
tax base can’t all be applied towards reducing rates or else we won’t be
able to get enough revenues to strike an agreement on deficit reduction.
Using tax reform to produce revenue departs from the 1986 model. Some
still haven’t accepted this reality. They believe that the dollars from
loophole-closing should all be used for rate reduction, rather than
Edward Kleinbard, former chief of staff at the Joint Committee on
Taxation, recently had a message for these holdouts. He said: “We have
to abandon our nostalgia for the Tax Reform Act of 1986. That tax reform
effort was revenue neutral because it could afford to be. … The fact
that we have to raise revenue today means that this tax reform effort
will look different.”
Kleinbard is right. In 1986, tax reform was an end unto itself—designed
to make the code simpler and flatter. This time, it cannot ignore the
most dangerous fiscal problem we face: our mounting deficit.
“OK, fine,” say some well-meaning conservatives. “All we have to do is
broaden the base enough to both reduce rates and reduce the deficit. The
1986 model can still apply.”
But hold on a minute. There is a second factor we must consider as we
approach tax reform. It is the staggering rise in income inequality. In
1986, there was certainly wealth agglomeration at the top, but not
nearly to the degree as is true now.
In the mid-1980s, we had just come off a period dating back to World War
II that saw the largest expansion of the middle class in American
history. Since then, however, middle class wages have stagnated—in fact,
the last decade was the first since World War II when the median family
income actually declined.
According to the Congressional Budget Office, thirty years ago, the top
one percent of households received 7.4 percent of total national income.
Today, the share of income going to those same households has jumped
more than 50 percent, to 11.5 percent.
According to one study looking at data up to 2007—just before the
recession hit—the average income for the top one percent of taxpayers
grew by a whopping 241 percent over the last 30 years. The average
income for the bottom fifth grew by merely 11 percent.
According to a 2011 study, the net worth of the Waltons alone is equal
to that of the bottom 30 percent of the country.
The 1986 tax reform law actually did work to make the code somewhat more
progressive by, among other steps, reducing the tax preference for
investment income. But subsequent changes to the code—in particular, the
2001 and 2003 tax cuts—undid that work. The capital gains rate was
reduced all the way to 15 percent, giving a large advantage to those in
the highest brackets.
High-income earners also gained the most from President Bush’s
across-the-board rate cuts. According to the Tax Policy Center, last
year the Bush tax cuts increased after-tax incomes for people making
over $1 million by an average of 6.2 percent — about $129,000 per
household. But for those with incomes between $40,000 and $50,000, the
increase was just 2.2 percent — or about $830 per household.
Over time, our tax code has widened the nation’s wealth gap. Reversing
this trend ought to be a top goal of tax reform; at a minimum, we
certainly should not make the tax code any less progressive than it
would be if the high-income tax cuts expired.
But a 1986-style approach that promises upfront rate cuts to the wealthy
is almost guaranteed to give middle-income earners the short end of the
The reason is, in order to raise enough money to both reduce tax rates
AND cut the deficit, you would need to slash deductions and credits on a
far greater scale than we ever did in 1986. Middle-income earners would
not be spared.
And because middle-income earners so rely on these expenditures, the
cost of losing them would likely exceed the benefit they would receive
from a lowered rate.
Multiple experts have verified this. The Joint Economic Committee
analyzed the tax reform plan contained in the House Republican budget
authored by Paul Ryan. It found that, in order to provide a lower top
rate of 25 percent for high-income taxpayers in a way that doesn’t add
to the deficit, the elimination of expenditures would result in a $2,681
annual tax increase for a married couple with joint income of $100,000.
The nonpartisan Tax Policy Center reached the same conclusion about a
similar plan promising a 20-percent across-the-board tax cut.
Under such a plan, the Center said, the average household with children
earning $200,000 or less would face an effective tax increase of $2,041.
There is a lesson to absorb from these studies: Beware tax reform plans
that only get specific about what top rate they want to lock in. It’s
also generally true that the lower the rate that gets promised, the
fewer details that get provided about the rest of their plan.
Simpson-Bowles promised a top rate between 23 and 29 percent. But take a
hard look at how this might be accomplished. They presented an
“illustrative plan” with a top rate of 28 percent paid for by deep cuts
in deductions. The plan did raise significant revenue, so would
genuinely help address our deficits. But it also raised taxes on middle
class families, with households making around $100,000 getting a tax
increase of over $1,000.
And under the Simpson-Bowles plan, high-income households would face a
smaller tax increase than they would if the tax cuts simply expired.
Senator Toomey last year offered a plan that claimed a 28 percent top
rate with few details on what would happen to expenditures.
And the House Republican budget, authored by Ryan, proposes the lowest
top rate of all—25 percent—and left huge holes in the rest of the plan,
the better to disguise its impact on the deficit and the middle class.
These promises of lower rates amount to little more than happy talk when
the math behind them doesn’t add up. And the risk for serious
policymakers is, if upfront rate cuts are the starting point for
negotiations on tax reform, it will box us in on what else we can
achieve. Certain lawmakers 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.
This is the trap of tax reform, and we must not fall for it. It is an
alluring prospect to cut taxes on the wealthiest people, reduce the
deficit and hold the middle class harmless, but the math dictates you
can’t have it all.
The reality is, any path forward on tax reform that promises to cut
rates will end up either failing to reduce the deficit or failing to
protect the middle class from a net tax increase. You can, at most,
achieve two of these goals; anyone pushing a plan purporting to
accomplish all three isn’t telling the truth. The sooner we are honest
with ourselves about this, the easier it will be to negotiate a
compromise on taxes.
In 1986, we chose to cut the top rate and protected the middle class. We
didn’t seek to reduce the deficit.
Simpson-Bowles seeks to cut the top rate and reduce the deficit, but
doesn’t seek to shield the middle class from a net tax increase.
We need a third approach that prioritizes reducing the deficit and
protecting the middle class, and is willing to forego a reduction in the
top rate. That’s what I am proposing today.
What would this proposal look like? It would have three principles.
First, as in 1986, it still makes sense to reduce the number of
expenditures in the code to the extent possible. But in figuring out
which credits and deductions to eliminate, we must draw a line when it
comes to protecting the middle class.
We must understand that many of the expenditures in the tax code are not
loopholes at all. Tax preferences for things like a college education
and retirement savings belong in the tax code even after reform happens.
They were put in the code on purpose to make a middle-class lifestyle
accessible and sustainable for more American families.
We recognized this in 1986. Even as we cleared out an underbrush of
loopholes, we preserved versions of the mortgage interest deduction, the
charitable deduction, and the state and local property tax deduction. We
realized that as much as we wanted to make the code more efficient,
these provisions were too essential to middle-class households. We must
abide by the same principle today.
So, if we seek to protect the expenditures that are most essential to
the middle class, and we still hope to reduce the deficit, we will need
to find alternative revenue sources.
This leads to the second principle of this new model for tax reform: the
top rate for the highest earners should probably return to Clinton-era
levels, and stay somewhere around there.
This will come as heresy to some of those on the other side, who not
only wish to extend the current rates in the upcoming lame duck, but
also hope to cut rates even further in tax reform. These folks believe
cutting the top rate as low as 25 percent is a necessary ingredient to
spurring an economic recovery.
But a Congressional Research Service analysis released last month
suggests otherwise. In a survey of the last 65 years of fiscal policy in
America, the report concluded that tax cuts “do not appear correlated
with economic growth.”
Recent experience, of course, suggests we have nothing at all to fear
from a return to Clinton-era rates on the wealthiest Americans. The 1993
balanced budget agreement, which was signed by Bill Clinton and set a
higher top rate, produced five years of GDP growth and the greatest
peacetime expansion of our economy in the nation’s history.
By contrast, as we all know, the decade shaped by the Bush tax rates
squandered our budget surpluses, produced net-negative jobs and
culminated in the Great Recession.
The lesson here is that contrary to the view of the supply-siders, the
level of the top rate does not, by itself, dictate what happens to GDP.
But a balanced budget—aided by increased revenues—just might restore
confidence to investors and jumpstart our economy.
For the third and final element of this tax reform model, we turn to
investment income. It’s time to reduce the sizable differential in the
tax treatment of earned and unearned income.
The reduction in the capital gains rate to 15 percent under President
Bush tax was a major contributor to the growth in wealth disparity we
Today the top 1 percent on average receives 20 percent of its income
from capital gains—10 times as much as the rest of the country. Capital
gains makes up 60 percent of the income reported by the Forbes 400.
The extremely low 15 percent rate in effect today is an outlier. It is
the lowest rate on investment income since the Great Depression.
Republicans have understood the need to raise it before. As part of the
1986 reform, Reagan raised it to 28 percent. Simpson-Bowles—which was
supported by good Republicans like Tom Coburn—endorsed raising it too,
all the way to the same level as ordinary income.
Now, if you are returning the top income rate to Clinton-era levels, as
I have proposed, I do think it is too much to treat capital gains the
same as ordinary income. We don’t need a 39.6 percent rate on capital
But without question, we need a narrower differential between earned and
unearned income than we have today. This will bring more fairness to the
code—Warren Buffett will have a harder time paying a lower effective
rate than his secretary—and also deliver more revenue to reduce the
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.
Now, you may ask, “Hey, what’s in this for Republicans? Why would they
come to the table around a proposal that doesn’t cut rates?”
For one thing, they get serious deficit reduction—which will matter to
the true budget hawks left within the Republican Party. That is no small
What else besides deficit reduction would Republicans quote-unquote
“get” out of tax reform? Well, that’s the wrong way to think about it.
The lure for Republicans to come to the table around a grand bargain
should be the potential for serious entitlement reform, not the promise
of a lower top rate in tax reform.
Democrats will never sign on to a shredding of the safety net because it
isn’t necessary to change the fundamental way Medicare works. But we can
find ways to reduce Medicare costs by hundreds of billions of dollars.
That is tough medicine but still preserves the safety net.
That is how a grand bargain can be had: Republicans get entitlement
reform, while Democrats get revenue.
One last note on the prospects for a deal of this kind. Republicans may
not be as far as you think from accepting the need for revenues out of
tax reform. There are two reasons for optimism.
For one thing, the public is indicating it favors our side’s approach on
taxes. A Washington-Post poll last week showed voters trust the
President’s handling on taxes more than Mitt Romney’s. An NBC-Wall
Street Journal poll also gave the President the edge on that issue. This
is the first time that Democrats have had the upper hand on taxes in
thirty years, and this represents a sea change.
This is causing Republicans to rethink their approach. Just look at
Governor Romney. In recent weeks, he has gone to great lengths to
moderate his tax proposal to appeal to a broader audience – going so far
as to promise in last week’s debate that he would not reduce the net tax
burden on the wealthy at all.
The second reason for optimism is because as hard as it may be for
Republicans to compromise on taxes, they may find the result of not
compromising to be even worse.
The scheduled expiration of all the tax breaks at year’s end gives
Republicans incentive to act. President Obama has stated with
equivocation that he will veto any extension of the tax cuts for the
uppermost brackets. Republicans may soon realize that is far better to
extend 98 percent of the tax cuts than none at all.
A story in today’s Financial Times – headlined “Republicans shift tone
on taxing the rich” – suggests many Republicans are reaching that exact
That would be the breakthrough tax reform needs—and Democrats should
seize upon it.
You know, it’s interesting. For years, many of my colleagues have fought
to end the reduced rate on the wealthiest Americans in the context of
the Bush tax cut debate.
Yet suddenly, when the same idea of cutting tax rates for the wealthy is
peddled under the guise of “tax reform,” too many people forget their
opposition to it. This doesn’t make sense.
The contradiction just goes to show how deep the nostalgia is for the
1986 tax reform agreement, and the bipartisan cooperation that made it
possible. But in the face of today’s yawning deficits, that framework is
past its prime.
In an earlier era, Reagan’s approach was the gold standard of tax
reform. But it’s long past time we moved off the gold standard.