More On Tax Planningfrom The Advisor's Professional Library
- Precious Metal Taxation Precious metals can be used to better diversify a portfolio but can be volatile. The tax implications of investing in these types of assets vary depending upon the situation.
- Long Term Care Insurance: Premiums While premiums for qualified long-term-care insurance may be deductible as medical expenses there are exceptions to this general rule. Learn how to avoid unnecessary tax liabilities.
Sen. Charles Schumer, D-N.Y., outlined Tuesday his own “way forward” to avoid the looming fiscal cliff and “break the deadlock” among lawmakers as they come to a “grand bargain” in the upcoming lame-duck session and move forward with reforming the tax code next year.
In a speech before a packed room at the National Press Club in Washington, Schumer, the Senate's third-ranking Democrat, told reporters that if you “ask policymakers–Democrats, Republicans and independents alike–what the broad outline of tax reform might look like, you get a startlingly consistent answer: dramatically lower the rates and broaden the tax base by getting rid of loopholes in the tax code.”
However, this approach–which was invented by President Ronald Reagan and Congress in 1986, and recently endorsed by the Simpson-Bowles plan as well as the “Gang of Six,” a bipartisan group of senators–should be “scrapped” in the upcoming talks on the fiscal cliff, Schumer said.
(The New York Times reported that Republicans, embodied by a spokesman for House Speaker John Boehner of Ohio, decried Schumer's speech.)
Schumer said “old style” tax reform is now obsolete because there are two new conditions that exist today that didn’t exist when the Tax Reform Act of 1986 was passed: “a much larger, more dangerous deficit, and a dramatic increase in income inequality.”
Schumer laid out his own three-pronged approach to tax reform, noting that “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.”
Schumer said his approach to tax reform prioritizes reducing the deficit and protecting the middle class and forgoes a reduction in the top rate. He then outlined the “three principles” of his proposal.
- First, he said, “as in 1986, it makes sense to reduce the number of expenditures in the code to the extent possible.”
- Second, the top rate for the highest earners should probably return to Clinton-era top rate levels of around 39.6% and 36%. But Schumer conceded that this idea will come as “heresy” to some Republicans, who believe that cutting the top rate as low as 25% “is a necessary ingredient to spurring an economic recovery.”
- Third, Schumer said, is reducing, not eliminating, the tax preference for investment income.
While Schumer said he’s confident a deal can be struck during the lame-duck session, he also said that if lawmakers “don’t change the direction of tax reform, we’re never going to get a deal. There is a genuine agreement that people [on both sides of the aisle] want to get to a deal.”
What has stood in the way of striking a deal to reduce the deficit thus far? “Every time we’ve come to a deadlock it has been on revenue, not entitlement reform,” Schumer said.
The “Gang of Six,” which recently expanded to the “Gang of Eight,” is meeting this week to hash over what published reports say are possible ideas for a framework of revenue increases and budget cuts that both parties could agree to. At the press briefing, Schumer said that he believes the eight Senators “can be a very constructive force.” The Gang of Eight includes four Republicans: Sen. Saxby Chambliss (Ga.), Sen. Mike Crapo (Idaho), Sen. Tom Coburn (Okla.), Sen. Mike Johanns (Neb.); and four Democrats: Sen. Mark Warner (Va.), Sen. Dick Durbin (Ill.), Sen. Kent Conrad (N.D.), Sen. Michael Bennet (Colo.)
Schumer noted too that even presidential candidate Mitt Romney is rethinking his approach to tax reform, going to “great lengths” in recent weeks “to moderate his tax proposal to appeal to a broader audience, and going so far as to promise [in the recent presidential] debate that he would not reduce the tax burden on the wealthy at all.”
Republicans, Schumer said, can be lured to come to the table around a grand bargain because of the potential “for serious entitlement reform, not the promise of a lower top rate in tax reform.” Democrats, he said, should be “prepared to make significant reforms to entitlements.”