Small Steps on Code Can Guide Budget Talks: Taxes

Lawmakers seeking an accord on a government budget should tackle incremental revisions to the U.S. tax code even if their talks fail to achieve the type of large-scale agreement on fiscal issues that has eluded Washington, a Treasury Department official said.

An accord on even limited modifications to tax law would help create momentum for the more significant revamp of Internal Revenue Service rules that leading lawmakers in both parties have endorsed, said Mark J. Mazur, the Treasury Department’s assistant secretary for tax policy.

“It may just be some small steps that are confidence-building and that allow you to take bigger steps later” is the best route to follow, Mazur said at the Commerce Department’s SelectUSA 2013 Investment Summit in Washington on Nov. 1, Bloomberg BNA reported.

The budget panel was formed as part of the congressional agreement that ended last month’s 16-day partial government shutdown. The 29-member panel, facing a self-imposed Dec. 13 deadline to offer ways to resolve the fiscal disputes that helped spur the shutdown, met last week and continued a clash over policies.

Representative Paul Ryan, a Wisconsin Republican and chairman of the House Budget Committee, said a push to raise taxes will result in stalemate. Senator Patty Murray, a Washington state Democrat who heads her chamber’s Budget Committee, said that any agreement to trim Social Security and Medicare benefits must be tied to added revenue.

Democratic Support

Many Democrats see tax code revisions that include ending or modifying some tax breaks as a politically acceptable way to generate revenue.

While the Obama administration would prefer comprehensive changes that address all aspects of the code -- both corporate and individual income tax -- currently the only consensus that can be reached appears to be on the corporate side, Mazur said. A full revision would also address the individual side, through which the majority of small businesses conduct operations as pass-through entities.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, has announced he would release discussion drafts on overhauling the tax code within the next two weeks. Lobbyists following the issue say that at least one draft would target international taxation.

Camp’s Plan

House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, has been conferring with Baucus for months on revamp plans and stressed his commitment to that goal. Camp has proposed lowering the top corporate rate to 25 percent from 35 percent, and reducing the top individual rate to 25 percent from 39.6 percent. He wants do that without shifting the tax burden across income groups and without losing or gaining federal revenue.

President Barack Obama has also laid out a framework for a redraft, and Mazur said “there’s a huge amount of overlap” on proposals for changing the corporate rate.

“That’s one where you can imagine making some progress,” Mazur said. “Once you do that, you can imagine moving on to harder areas, potentially tax reform of the individual income tax.”

Mazur was more equivocal on whether the administration would consider agreeing to an income repatriation holiday to prod the tax revision effort.

“I think the literature is pretty clear on the effects of a repatriation holiday being not that great,” Mazur said, referring to the 2004 tax break for offshore profits when significant amounts of income held overseas by U.S. businesses were “brought home” at a bargain rate.

Plan Needed

“Not that much was really invested in productive activities,” he said. “However, when you think about transitioning to a new reformed tax system, you have hundreds of billions offshore; need to figure out what to do with those,” he said.

Camp has “had some very clever ideas on how you could go about making that transition from the current system to a newer system. And that’s an area where you really want to have a conversation about what’s the best way, what’s the most effective way to have that transition occur,” Mazur said.

A one-time tax at reduced rates on offshore earnings “would be one possibility there,” Mazur said.

(Deletes comment by Mazur that appeared as second paragraph under ’Plan Needed’ subheadline in story that ran Nov. 5.)
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