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Sept. 16, 2011 – 8:52 p.m.

Finance Committee Takes Its Own Look at Taxes

By Sam Goldfarb, CQ Staff

Somewhat overshadowed by the new deficit reduction committee, a much older congressional panel has quietly begun to examine options for raising tax revenue, signaling a new phase in the push to restructure the tax code.

Although it has been holding hearings on a possible tax overhaul all year, the Senate Finance Committee has picked up the pace in the past few weeks. It has started to delve more deeply into the challenges of an overhaul rather than just its potential benefits.

Scaling back tax incentives for personal savings and raising taxes on investment income were among the issues explored last week by the panel, which traditionally holds broad sway over the federal budget, including the tax system.

Aides to Finance Chairman Max Baucus, a Montana Democrat, said the hearings have become more serious, and Baucus himself has suggested that the meetings reflect growing pressure on Congress to produce results.

The intention, he said Sept. 15, is to “ask a lot of questions because clearly there will be tax reform sometime soon. The more we can do, the more we can learn.”

A strong consensus exists in Congress for rewriting the tax code by eliminating tax breaks and lowering tax rates, following a template set by the Tax Reform Act of 1986 (PL 99-514).

Last week, Speaker John A. Boehner, R-Ohio, reaffirmed his support for an ’86-style tax bill, and for the first time said it would be appropriate for the deficit reduction committee to lay the “groundwork” for “broad-based tax reform.”

President Obama is also expected to establish principles for a tax overhaul when he presents a plan for long-term deficit reduction Monday. Later this week, the deficit reduction committee, which includes Baucus, will explore possible tax changes in a hearing of its own.

Advocates of tax simplification argue that it could foster economic growth and make life easier for taxpayers. But paying for lower rates and possibly reducing the deficit would also mean killing or downsizing popular programs run through the tax code.

Largely as a result, while lawmakers and the White House have talked a great deal about a tax overhaul this year, no one has put forward a detailed proposal.

Savings Incentives Under Scrutiny

Recent hearings conducted by the Finance Committee by no means indicate that senators are close to introducing major tax legislation — there are no signs that staffers are even working on a bill — but they do show lawmakers taking cautious steps into more politically treacherous territory.

In that vein, Baucus suggested last week that the government “could do more with less” to promote retirement savings — in other words, somehow help individuals save more while raising revenue.

Finance Committee Takes Its Own Look at Taxes

As it stands, the government encourages savings in varied ways, from not taxing 401(k) plans and Individual Retirement Accounts until money is withdrawn from those plans, to a “savers credit” for low-income workers. The generous tax treatment of retirement plans costs the government more than $100 billion each year, according to the Treasury Department, making it one of the most expensive features of the tax code.

Economists generally believe that it is a good idea for the government to promote retirement security, particularly because the U.S. income tax is seen as a deterrent to saving, unlike the consumption taxes that exist in other countries.

Still, some experts have offered ideas for changing current savings incentives in ways that would reduce the deficit. The Congressional Budget Office, for instance, has suggested lowering the base cap on annual employee 401(k) contributions from $16,500 to $14,850 and IRA contributions from $5,000 to $4,500, raising an estimated $45.9 billion over 10 years by decreasing the amount of tax-sheltered income.

Another proposal from William Gale, of the Urban-Brookings Tax Policy Center, would tax all employer and employee contributions to retirement accounts. As an alternative benefit, it would offer employees a refundable tax credit worth 18 percent of their annual savings that would be deposited directly into their retirement accounts.

Gale, testifying before the Finance panel, said his proposal would raise $458 billion over 10 years. It would, he said, offer more help to low-income earners than the current system, provide the same assistance to middle-income earners, and raise taxes on people in the top 40 percent of the income distribution.

Little Agreement

Critics of Gale’s proposal, including Utah Republican Orrin G. Hatch, ranking member on the Senate Finance Committee, argue that it would remove incentives for businesses to provide their employees with retirement accounts.

No senator at the Finance hearing explicitly supported the proposal, although the tax writers mostly held their fire and even Hatch said the discussion was surprisingly “interesting.”

A day earlier, passions ran a bit higher, as the Finance panel broached the subject of raising tax rates on capital gains and dividends. Republicans have long argued that keeping taxes low on investment-related income is important for the health of the economy.

But Obama has endorsed raising taxes on capital gains and dividends from 15 percent to 20 percent for upper-income earners, a change that the White House estimates would raise nearly $124 billion over 10 years. Congress increased the levy on long-term capital gains from 20 percent to 33 percent to help pay for the 1986 tax overhaul.

Boehner, in his speech on the economy last week, said it would be too difficult for the deficit-reduction committee to produce tax overhaul legislation by its late November deadline.

For the most part, Republicans to date have expressed interest in raising revenue only if the entire tax code is restructured and marginal tax rates are lowered.

Democrats still insist that the new committee could agree to more targeted revenue increases in addition to spending cuts to reach its goal of $1.2 trillion in savings.

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