During a speech today at the National Press Club, Sen. Chuck Schumer (D-NY) came out against one of Washington’s current favorite ideas: tax reform that closes loopholes and removes deductions, in exchange for lowering tax rates (particularly at the top of the income scale). Schumer called for scrapping that model, and instead instituting tax reform that uses the revenue raised from eliminating loopholes and deductions to reduce the deficit:
There 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 The old style of tax reform is obsolete in a 2012 world.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 conditions worse.
This sort of approach certainly makes sense, as income inequality has skyrocketed over the last few decades at the same time that income tax rates on the rich have tumbled. One of the drivers of income inequality is the low rate on capital gains, which almost exclusively benefits the rich.
Schumer, unfortunately, came out against revenue-positive corporate tax reform, which would also be a good idea. The Financial Times, meanwhile, reported today that some Republicans “are shifting their tone on the prospect of increasing taxes on the wealthiest Americans,” in an effort to avoid the effects of the so-called “fiscal cliff.”