Chuck Schumer gets his message across

Here’s some additional analysis of Chuck Schumer’s big speech to the National Press Club that really disrupted any effort to put together a grand bargain on tax and fiscal policy issues. Here’s the key point:

Schumer said tax reform should be rooted in three principles: First, reduce tax deductions and loopholes while protecting those most important to the middle class. Second, increase the top rate on high-income earners from 35 percent to its Clinton-era 39.6 rate. Third, narrow — though do not eliminate — the differential in the tax code’s treatment of earned and unearned income.

So Schumer, who has been at the forefront of defending the carried interest loophole, actually sacrifices it in this speech – at least some of it, in the interest of getting half a loaf over none at all.

Schumer believes this will raise $1.5 trillion. You get around $1 trillion with just the increase on the tax rates about $250,000. So the deductions/loopholes/capital gains changes would net around $500 billion over ten years.

Then there’s the troubling two-pronged approach to get Republicans on board with this:

“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,” Schumer said during his prepared remarks.

Those concessions would not include privatizing Medicare, Schumer insisted, but could amount to hundreds of billions of dollars in savings. “Democrats will never sign on to a shredding of the safety net because it isn’t necessary to change the fundamental way Medicare works,” he said. “But we can find ways to reduce Medicare costs by hundreds of billions of dollars.”

That’s the carrot — the stick, he said, is that if Republicans don’t negotiate a deal along these lines, taxes will go up by a whole lot more.

“The scheduled expiration of all the tax breaks at year’s end gives Republicans incentive to act,” he said. “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.”

All of this is predicated around the idea that a grand bargain has to happen. This actually damages America and our economic future in meaningful ways, by allowing policymakers to take their eye of the near-term economic outlook by focusing on an unknowable long-term possibility. The only way to “fix” the long-term deficit is to make a change to how the CBO scores the long-term budget outlook. That’s the key component of all grand bargain plans – reduce health spending growth to a certain percentage of GDP, for example. We focus on accounting rather than immediate public needs.

So is Schumer participating in that, by granting the need for a grand bargain? I’m not entirely sure. Tax “reform” is so central to the grand bargain idea, so necessary to get Republicans involved in the conversation, that the prime directive here could be not to facilitate a grand bargain but to derail it. In doing so, Schumer is defying key members of his own party who have been pursuing the grand bargain along the lines of base-broadening, rate-lowering tax reform. That includes Dick Durbin, who in the near future will be Schumer’s key rival for the Senate leadership, and President Obama. And Mitt Romney, for that matter, who is using this myth of tax reform to justify how his 20% across-the-board cut to rates won’t reduce revenue. Schumer end runs all of them by cutting off the tax reform carrot.

He also adds this entitlement reform carrot. But that was already on the table, put there by the President. It wasn’t enough to entice the GOP before; remember during the primaries, when every candidate rejected a 10:1 split on deficit reduction between spending cuts and tax increases? The big derailment in the grand bargain talks in 2011 happened when John Boehner held firm on only deriving tax increases, which Obama needed to sell the plan to his base, from this kind of rate-lowering, base-broadening reform (actually worse than that, he wanted the tax reform “dynamically scored” to prove that tax cuts increase revenue through growth). So if that’s off the table, Republicans are far, far less likely to come to the negotiation.

Schumer isn’t the only voice in the party, of course. He could get overruled. But he’s really saying here that the legacy of Democrats as the party of austerity puts them in situations that allow them to get conned by Republicans. End the con, Schumer says, and come to the negotiation without a pre-compromised muddle. Since Republicans won’t compromise, that probably dooms the grand bargain. Which is a good thing.