New York senator says no to tax cuts in a deficit deal

Schumer draws sharp GOP reaction

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WASHINGTON -- New York Sen. Charles E. Schumer, the Senate's third-ranking Democrat, threw cold water Tuesday on one emerging approach for striking a bipartisan deficit-reduction deal -- an overhaul of the tax code that lowers top income tax rates but raises more revenue. Mr. Schumer's position complicates efforts to seal a deal before January, when the "fiscal cliff" of tax increases and automatic spending cuts goes into effect.

In a National Press Club speech, Mr. Schumer branded the idea of a tax code overhaul that could simultaneously lower the top rates, bring in more revenue and protect middle-class taxpayers from increases as "little more than happy talk."

Instead, he said the top two income tax rates should be frozen around 36 percent and 39.6 percent, levels from the era of former President Bill Clinton, and that any additional revenue generated by closing loopholes and curtailing or eliminating tax deductions and credits should be devoted to deficit reduction.

"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," said Mr. Schumer, a member of the tax-writing Finance Committee. "The reality is, any path forward on tax reform that promised to cut rates will end up either failing to reduce the deficit or failing to protect the middle class from a net tax increase."

Republicans reacted harshly to Mr. Schumer's position, which they said could ensure that the nation careers off the fiscal cliff in January, when all of the Bush-era tax cuts expire and $1 trillion in automatic, across-the-board cuts to defense and domestic programs over the next 10 years begin to go into force.

"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," said Kevin Smith, spokesman for House Speaker John A. Boehner, R-Ohio. "Sen. Schumer seems to be off an island with these remarks."

Sen. Lamar Alexander, R-Tenn., who is negotiating with Sen. Michael Bennet, D-Colo., on a deficit-reduction framework, said: "While many of us from both parties are working quietly to try to find common ground for a budget agreement that will get the economy moving, Sen. Schumer is on the front pages four weeks before an election offering a proposal to raise taxes. In my view, both his timing and his recommendations are unhelpful and unsound."

But some Democrats involved in the negotiations say Mr. Schumer's position could prove helpful, by demarcating the left's opening position on tax cuts for the rich and by opening a new avenue for negotiation over entitlements.

Mr. Schumer said Republicans would be drawn to the table by the prospect of making structural changes to Medicare and Social Security. While he did not specify what changes he would accept, Republicans in deficit talks have demanded the restructuring of entitlements in exchange for added revenues.

A White House official said Mr. Schumer's remarks underscored President Barack Obama's position that the wealthy and big corporations would have "to pay their fair share" in any deficit deal.

"Schumer's speech puts him squarely in the get-a-deal camp, and he willingly put entitlements on the table," said Jim Kessler, senior vice president for policy at Third Way, the centrist Democratic group. "That's a big move."

The speech also signaled that negotiations confined previously to back-bench lawmakers are beginning in earnest. The so-called Gang of Eight -- four Democratic senators and four Republican senators -- have been negotiating a deficit-reduction deal that embraces tax changes that lower rates and increase revenues as a central pillar. The group held a closed-door meeting Tuesday.

Republican presidential nominee Mitt Romney and his running mate, Rep. Paul D. Ryan, R-Wis., have also proposed a tax code overhaul to lower rates across the board, but they have wanted to keep overall revenues about where they are now.

With his speech Tuesday, Mr. Schumer is planting a new Democratic flag. Any overhaul of the tax code should freeze the top two personal income tax rates, hold the middle class harmless and raise capital gains rates to close the difference between the way the tax code treats earned and unearned income.

Mr. Schumer said the reason deficit negotiations have been fruitless is that they have started from a mathematically impossible position: that all tax rates should come down while revenues go up.

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