Schumer to Tax Reform: Drop Dead

The polls say voters want more bipartisanship, and one possibility in 2013 is tax reform that trades lower rates for fewer loopholes. Well, so much for that. The man who wants to be the next leader of the Senate Democrats has declared that this "old-style of tax reform is obsolete."

The antireformer is Chuck Schumer, the Senator from Wall Street, er, New York, who averred at the National Press Club last week that his party will have nothing to do with tax reform of the kind that Ronald Reagan negotiated with Democrats in 1986, or that the Simpson-Bowles deficit commission proposed in 2010, or that the Gang of Six Senators have been working on. It's Chuck's way or no way.

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New York Senator Chuck Schumer at the Democratic National Convention in Charlotte, N.C., in September.

The Reagan model of reform "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," Mr. Schumer said. "A much larger, more dangerous deficit, and a dramatic increase in income inequality. Old-style tax reform could make both conditions worse."

Mr. Schumer says the only way to reform is to broaden the tax base and raise tax rates. If you're wondering how this differs from a plain vanilla tax increase, good question. The Democrat says that all revenue from any tax loophole closing must go to "reduce the deficit, which is strangling our economic growth."

That's a good one coming from a Senator who has never met a spending increase he didn't like and who has led the fight against spending cuts offered by House Republicans in the last two years. When he says all revenue should go toward "deficit reduction," he's merely offering political cover for more future spending. Without a change in the tax code or permanent changes in the structure of entitlements, there is no way to prevent Congress from spending every dime raised from loophole closing.

Mr. Schumer's real agenda is betrayed by his other reason for opposing tax reform—income inequality. The affluent simply make too much money, so they must have more of it taken away and redistributed by . . . Mr. Schumer.

To be more precise, tax rates must rise to give the appearance of taking more income from the rich. We say "the appearance" because Mr. Schumer knows that higher tax rates increase the incentive for Congress to write loopholes that the rich are in the best position to exploit. And guess which Finance Committee Senator will be standing in Gucci Gulch charging a campaign-finance toll for writing those loopholes?

The ol' Harvard Law populist himself.

Mr. Schumer ignores that the tax code is already steeply progressive, with the richest 1% paying 38.7% of all income taxes in 2009. He also claims that tax rates have little or no effect on growth, citing a study that is an outlier in the economic literature. The mainstream agrees with Harvard economist Dale Jorgenson, who recently told Congress that tax reform would raise long-term U.S. output "equivalent to a $7 trillion increase in our national wealth."

Curiously, Mr. Schumer also says "it is imperative that we seek to reduce the corporate tax rate from 35%" in a revenue-neutral way. He says lower rates for companies will "boost growth and encourage more companies to reinvest in the United States."

So a 35% tax rate on corporations hurts growth and investment, but tax rates approaching 50% on small businesses and subchapter S corporations (which pay taxes at the individual rate) are no problem. This is Democratic corporatism, favoring big over small business. In particular look for Mr. Schumer to protect the 15% tax rate on carried interest to please his hedge-fund contributors. A genuine tax reform would tax business income at the same rate.

Mr. Schumer's speech is best understood as a political marker no matter who wins re-election. If Mitt Romney wins, Mr. Schumer will browbeat any Democrat who even thinks about supporting a Simpson-Bowles-Reagan-style reform. If President Obama wins, the Senator will fight the kind of tax deal that House Speaker John Boehner has said he wants as part of a grand budget compromise. Who's the real partisan obstructionist?