UPDATE 3-Reagan tax model obsolete in fiscal cliff talks-Schumer

(Adds Gang of Eight details, presidential positions)

By Kim Dixon

WASHINGTON, Oct 9 (Reuters) - A top Senate Democrat onTuesday said new tax revenues should go to reducing the federaldeficit, not cutting tax rates, dismissing as "obsolete" aReagan-era model of tax reform.

Senator Charles Schumer, hardening his party's negotiatingposition ahead of talks on the so-called "fiscal cliff,"declared President Ronald Reagan's 1986 tax reform anunaffordable model for overhauling the tax laws.

U.S. tax policy experts have long advocated Reagan'sapproach of "revenue neutrality," or using new governmentrevenues from closing tax loopholes to pay for tax rate cuts.

Schumer urged devoting new revenues wholly to deficitreduction instead, and advocated raising tax rates on the richin any deal to avoid the fiscal cliff approaching at year-end.

"Tax reform 25 years ago was revenue-neutral. It did notstrive to cut the debt. Today, we can't afford for it not to,"Schumer said in a speech at the National Press Club.

"It would be a huge mistake to take the dollars we gain fromclosing loopholes and put them into reducing rates for thehighest income brackets, rather than into reducing the deficit."

Two Democratic Senate aides said the speech was an attemptby Democrats to harden their position ahead of "fiscal cliff"negotiations set to get under way after the Nov. 6 elections.

Republican Senator Orrin Hatch blasted Schumer's comments,and criticized Democrats, saying in a statement that their"default position" is to raise taxes.


At the end of the year, several urgent fiscal issues willconverge, including the expiration of lowered individual incometax rates enacted a decade ago under President George W. Bush.

The Bush tax cuts were due to expire at the end of 2010, butObama and Congress agreed to extend them for two years toprevent damage to the economy.

In addition, $100 billion in automatic federal spendingcuts will take effect unless Congress acts. Combined, theseevents could push the economy into a recession, studies haveforecast.

Decisions on the "fiscal cliff" will be strongly influencedby the outcome of the elections, of course, and will be aproving ground for Congress' ability to tackle a potentiallymore fundamental tax code overhaul, perhaps in 2013.

The tax code has not been overhauled thoroughly in 26 yearssince Reagan and a divided Congress managed to do it. Eversince, the Reagan reforms have been seen as a model, with"revenue neutrality" being their central feature.

Schumer said that model is outdated. "In the upcoming talkson the fiscal cliff, we ought to scrap it," Schumer said.

If applied today, revenue neutrality would inevitably hurtthe middle-class by forcing curtailment of tax breaks dear toaverage Americans, he said.

"A 1986-style approach that promises upfront rate cuts tothe wealthy is almost guaranteed to give middle-income earnersthe short end of the stick," said Schumer, the third most seniorDemocrat in the Senate.


Both President Barack Obama and Republican challenger MittRomney say taxes need an overhaul, but disagree on details.

Obama backs raising individual income tax rates on thewealthy by letting their Bush tax cuts expire, but extending theBush tax cuts for the middle class. He has also presented adetailed plan on corporate tax breaks he wants to kill.

The president also wants to raise the tax rates on dividendsand on capital gains for the two highest income tax brackets.

Neither Obama nor Romney has presented specifics on what todo with the costliest tax breaks such as the mortgage interestand charitable donation deductions, although both have discussedthe possibility of capping deductions at some level.

Romney has called for a 20 percent across the board cut inall tax rates, as well as eliminating the estate tax and thealternative minimum tax - changes that would help the wealthy.

But Romney has also said he will not reduce the share oftaxes paid by the wealthy. He has said he will pay for his taxcuts by ending tax breaks, but he has not said which ones.


Clint Stretch, a former congressional staffer on budgetissues and former top tax lobbyist, says Schumer is right tocaution that middle class tax breaks may be in jeopardy.

"If you don't raise taxes you'll have to get rid of a lot offederal programs very important to the middle class," he said.

Schumer said he backs efforts by a bipartisan group ofsenators known as the "Gang of Eight." This group met again onTuesday to discuss a possible deal on the deficit. Such meetingshave been going on for years, with no solid results, aides said.

The group of four Democrats and four Republicans ranges fromliberals to some of the most fiscally conservative lawmakers.

Operating outside of the formal tax-writing committees andparty leadership, the lawmakers have been trying to forge abroad deficit-cutting plan that could include new revenue, aprospect that many in the Republican party adamantly oppose.

(Editing by Theodore d'Afflisio, Kevin Drawbaugh and TimDobbyn)