CQ TODAY ONLINE NEWS – TAXES
July 13, 2011 – 4:55 p.m.
Joint Hearing Examines Possible Components of Tax Code Overhaul
By Sam Goldfarb, CQ Staff
House and Senate lawmakers have resumed their slow push for a comprehensive overhaul of the tax system, less than a week after leaders of both parties reached an impasse on how to expedite the process.
The tax-writing Senate Finance and House Ways and Means committees on Wednesday held their first joint hearing since 1940, when lawmakers were considering a tax on businesses to bolster a military build-up.
The official subject of Wednesday’s hearing was the tax treatment of debt and equity and how it could be changed in an overhaul. But lawmakers, particularly Democrats, allowed themselves to be distracted by the efforts to reduce the deficit and raise the debt limit by Aug. 2.
Ways and Means ranking member
Levin was referring to the debt talks generally, but one recent turn in that debate held particular consequences for Wednesday’s discussion. Last week, House Speaker
Obama argued that it should raise at least $1 trillion over 10 years, compared with an extension of current policy, while Boehner, using the same baseline, insisted that it be deficit-neutral.
Although Democrats and Republicans largely agree that the tax code could be improved, their disagreement on whether revenues should be raised has always threatened to undermine their efforts to reach consensus on the structure of the system.
Since the start of the year, Ways and Means Chairman
A tax overhaul “isn’t something the House can do alone, and it’s not something just the House and Senate can do,” he said. “We need to really try to have the administration a partner in this as well.”
Favoring Debt
A broadly accepted principle of a tax code rewrite is that it should create a more efficient system by lowering tax rates and curbing various deductions, credits and exclusions for individuals and businesses.
To that end, lawmakers on both sides of the Capitol have been taking a closer look at the code in a steady stream of hearings dating back to late last year.
Wednesday’s discussion on debt and equity focused lawmakers’ attentions on a complex issue with potentially far-reaching implications.
Joint Hearing Examines Possible Components of Tax Code Overhaul
Most tax experts agree that the current tax code creates incentives for both individuals and businesses to take on debt, in part by allowing them to deduct interest of wide-ranging origins.
Individuals, for example, can deduct interest on their mortgages as well as student loans. Businesses can deduct interest on various debt-financing instruments, though they are not allowed to deduct dividend payments to owners of their stock, creating what some believe is a bias in the code for debt over equity.
Witnesses at the hearing, including Pamela Olson, a lawyer and former assistant Treasury secretary for tax policy under President George W. Bush, and several economists, offered a range of options to create a more balanced system.
Among them would be allowing businesses to deduct some of the cost of their dividends payments. That would be a business-friendly move, although it would cost the government revenue.
Another idea would be to limit or eliminate the deductibility of interest for businesses and use the resulting revenue to help offset the cost of lowering the corporate tax rate. A third possibility would be to focus specifically on the financial sector and tax banks when they become overleveraged.
Presenting the results of a months-long study, Thomas Barthold, chief of staff for the Joint Committee on Taxation, reaffirmed that the tax code generally favors debt. But he said there was relatively little evidence to support assertions that the growth in household and business debt that played a role in the financial crisis could be attributed to the tax code.
Proceeding Carefully
For the most part, lawmakers steered the conversation toward business questions and away from the individual side of the tax code, where there are more political landmines.
Still, Levin and Rep.
Camp, in remarks to reporters after the hearing, signaled that the tax treatment of debt could be ripe for changes but declined to endorse any particular policy.
There is not “necessarily one way to move forward on this issue, so I think it’s going to take a number of discussions about how to address it, but it is a part of the building blocks of fundamental tax reform,” he said.