Senators: Reform taxes from scratch

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WASHINGTON — The Senate’s chief tax writers want to scrap the entire code and start from scratch in their push for tax reform, and on Thursday they gave lawmakers a month to make a case for preserving some of the $1.3 trillion in breaks on the books.

In a letter sent to all 98 of their colleagues, Senate Finance Committee Chairman Max Baucus, D-Mont., and his Republican counterpart, Sen. Orrin Hatch (Utah), said they would take a “blank slate” approach to the tax code that assumes the removal of thousands of popular perks, including such sacrosanct policies as the deduction for mortgage interest, the child credit, and the lower tax rate for dividends and capital gains.

“This blank slate is not, of course, the end product, nor the end of the discussion,” Baucus and Hatch wrote. “Some of the special provisions serve important objectives. Indeed, we both believe that some existing tax expenditures should be preserved in some form.”

However, the letter says, “the tax code is also littered with preferences for special interests. We plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.”

The announcement puts Senate tax writers on the same page as House Ways and Means Committee Chairman Dave Camp, R-Mich., and clears the way for substantive work to begin on the first comprehensive rewrite of the tax code in nearly three decades.

“Today’s announcement by Chairman Baucus and Senator Hatch is welcome news for Americans who deserve a simpler, flatter, fairer tax code that leads to more jobs and higher wages,” Camp said. “This significant step forward underscores that the Senate and House are on the same page as they work in a bicameral, bipartisan manner to fix our broken tax code.”

The plan touched off quiet grumbling among some Democrats, who would be forced to defend favored breaks, such as the deduction for state and local taxes.

But it drew praise from many Republicans, and from advocates of debt reduction, who say the zero-based approach increases the odds that lawmakers will actually agree to eliminate some expensive tax breaks.

“Starting with the Zero Plan doesn’t absolve policymakers of the hard choices, but it surely does change the presumption by turning the tables on defenders of the status quo and forcing them to make the case for their particular tax preference,” said a statement released by Erksine Bowles and Alan Simpson, the co-chairs of President Obama’s fiscal commission, who used a similar approach to build bipartisan support for their own debt reduction blueprint.

Bowles, who served as chief of staff to President Bill Clinton, and Simpson, a former GOP senator from Wyoming, concluded that they could reduce the top tax rate to 23 percent for individuals by wiping out every tax break in the code.

Aides in both parties acknowledged that a tax bill cannot pass unless Obama and congressional Republicans resolve their long-standing dispute over the national debt. Obama wants a tax overhaul to generate additional revenue as a way to rein in borrowing; Republicans say they will agree to fresh revenue only if Democrats agree to restrain spending on expensive health and retirement benefits.

That fight is likely to be revived in the fall, when Congress once again will risk a national default on its debt obligations unless it agrees to raise the federal debt limit.

Until then, Baucus, Camp and Hatch have agreed to set aside the question of whether savings from the elimination of tax breaks, known as “tax expenditures,” should be used to reduce the deficit or to lower tax rates. Instead, they said they will scrutinize the breaks themselves to determine how much money could actually be saved.

Thursday’s letter, as a result, offers no estimates for potential savings, nor does it suggest how far the committee might be able to push down income tax rates, which top out at 39.6 percent for individuals and 35 percent for corporations. The letter says only that “the blank slate approach would allow significant deficit reduction or rate reduction” while maintaining the current distribution of the tax burden across taxpayers at all income levels.

But Baucus and Hatch warned their colleagues that keeping any of the tax breaks could significantly reduce the cash available for either goal.

Tax breaks cost the U.S. Treasury roughly $1.3 trillion a year, according to official estimates, or about $13 trillion over the next decade. (Only a portion of that cash is likely to be recovered by eliminating the breaks, however.)

According to estimates prepared by the nonpartisan Joint Committee on Taxation, the senators said, adding back $2 trillion in breaks “would, on average, raise each of the seven individual income tax brackets by between 1.3 and 2.2 percentage points from what they would be under the blank slate.”

Likewise, they said, “every $200 billion of corporate tax expenditures that are added back to the blank slate would, on average, raise the top corporate income tax rate by 1.5 percentage points from what they would be under the blank slate.

“These estimates demonstrate that the more tax expenditures we allow in the tax code, the less we will be able to reduce tax rates or reduce the deficit.”

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