June 11, 2012
Sen. Baucus Sketches His Vision for Tax Overhaul
Senate Finance Committee Chairman Max Baucus outlined his vision for overhauling U.S. tax rules, saying the system must do more to promote private-sector growth and opportunity but also must raise more revenue to avoid a fiscal crisis.
The Montana Democrat provided few details on how to pull off that difficult balance, however, seeking to steer a careful centrist course between the two parties’ divisive rhetoric on taxes.
Mr. Baucus also avoided taking specific positions on several tough policy issues, such as where to draw the line on raising taxes for some high-income households, as Democrats want, or when to impose tax increases. Mr. Baucus said only that deficit reduction “needs to ramp up over time, to avoid slowing down the economic recovery.”
Instead, Mr. Baucus focused on the broad case for moving forward with a rewrite, while steering clear of difficult details. The speech – to a bipartisan think tank – appeared to be an attempt to stoke momentum for the effort at a time when election-year differences between the parties have slowed progress to a standstill.
Mr. Baucus said that if the U.S. doesn’t act soon to solve its tax and budget problems, “it could lead towards fiscal crisis like some European countries.” In particular, he said that tax revenues as a share of gross domestic product are “the lowest they have been since World War II.” “We simply don’t raise enough revenue,” he said.
But he also noted that the U.S. business tax system has not kept up with other countries’ changes, “and now it’s acting as a brake on our economy when we need to move at full speed.” He echoed calls by leaders of both parties to lower the U.S. corporate rate, currently the highest in the developed world.
He also suggested that big changes are needed in the U.S. rules on companies’ international operations, which he termed the “worst of all worlds.” The current rules make the U.S. less attractive as a home base for businesses, and also make domestic firms more vulnerable to takeover by foreign rivals, he suggested. At the same time, however, the rules also give U.S. companies more incentives to locate new investments overseas, and particularly in tax havens, many tax experts say.
But Mr. Baucus stopped short of advocating that the U.S. follow the rest of the developed world and switch to a territorial tax system – one that taxes only a firm’s domestic income. That position is favored by many Republicans, as well as businesses, but so far is being opposed by the Obama administration. The U.S. currently seeks to tax companies’ global income.
Mr. Baucus also suggested that the current tax system has contributed to diminished incomes and opportunity for many people. The tax system must ensure that the U.S. remains fertile ground for innovation, he said.
In the end, Mr. Baucus said, a tax revamp can do much to improve U.S. economic performance.
Tax reform “can put America back on top,” he said.
Mr. Baucus added that he’s making progress on a “detailed tax reform proposal that will attract bipartisan support.” But he suggested that action wouldn’t come until after the election.
The speech’s lack of detail reflects the difficulty leaders face in crafting legislation until they know which party will control the Congress and the White House next year. Mr. Baucus faces a particularly tricky political path, because he’s up for re-election in 2014 in a state that is viewed as highly competitive this year for Republicans.
Election-year politics isn’t the only problem for overhauling the U.S. tax system. Other developed countries have raised their value-added taxes to shore up revenues, as they’ve slashed their corporate taxes to remain competitive. The U.S. doesn’t have a VAT, however. The current U.S. tax rules also could be more favorable to big multinationals than a new system would be, so large firms might not have much incentive to support an overhaul.
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