Senate Finance Committee Chair Max Baucus says tax reform is needed to bring down deficit

WTF Baucus tax reform 6.11.12

Senate Finance Committee Chairman Max Baucus (D-Mont.) stressed today that deficit reduction cannot be achieved through spending cuts alone and urged Congress to overhaul the tax code to bring in more revenues to help get the nation’s fiscal house in order.  

“If we’re going to solve our debt and deficit, we have to look at revenue. We have to look at revenue. Mathematically, arithmetically there is no escape. We have to,” said Baucus.

Read more: CBO report shows extending Bush tax cuts will raise deficit

Speaking at the Bipartisan Policy Center, Baucus pointed out that tax revenues as a share of the economy “are the lowest they have been since World War II” even as the U.S. fought two decade-long wars in Iraq and Afghanistan and suffered through the worst economic downturn since the Great Depression.

The combination of revenue decline (largely due to the Bush-era tax cuts) and spending increases (much of which went to fund the wars, the bailouts, and social services during the recession) have ballooned the national debt, which now takes up 75% of the total U.S. GDP in 2012. (GDP – refers to gross domestic product – measures the value of all goods and services produced within a country.)

But while much of the deficit debates have focused on drastic spending cuts and reforms to entitlement programs such as Social Security and Medicare, Baucus said lawmakers must also pay heed to reforms that would raise – and stabilize – tax revenues. Otherwise, he warned, the U.S. could be heading toward a similar fiscal crisis currently plaguing Europe.

Read more: CBO warns of approaching ‘fiscal cliff’

“Deficit reduction must include both spending reductions and revenues, which need to ramp up over time to avoid slowing down the economic recovery,” said Baucus. “Any tax reform plan must be developed with a sound budget in mind that reduces deficits and the debt.”

While not providing much details, Baucus outlined some of the principles that have guided his pending tax reform plan.

The Montana Senator said his plan was designed to achieve job creation, promote U.S. competitiveness, foster innovations, and provide opportunities to “secure [America’s] lead in the global economy.” Achieving those objectives would require lawmakers to simplify and update the tax code to meet the needs of the 21st century economy as well as addressing the uncertainties surrounding the various expiring tax provisions.

Scrapping tax expenditures to lower overall tax rates

In his remarks, Baucus appeared to lean in favor of eliminating so-called “tax expenditures” – or various tax breaks, deductions, credits that benefit select groups – in exchange for lowering overall tax rates, particularly the corporate tax rate which is currently one of the world’s highest at 39.2%.

“Tax breaks have doubled since 1986 and they now cost as much revenue as the entire income tax brings in. Some are worthwhile, but many fail to create jobs or growth,” he explained. “Most economists agree that lowering rates and paying for it by getting rid of tax expenditures generates growth.”

Simplifying and creating more certainty in the tax code 

While politically unpopular to do so, eliminating tax expenditures will also create more certainty in the tax code, which is dotted with 132 expiring tax provisions, including the Bush-era tax cuts, that require Congressional renewal each year.

“That [uncertainty] makes it hard for families and businesses to plan or invest in their futures,” Baucus said.

Baucus proposed that Congress should “take a hard look” at every expiring provision and decide which ones to let expire and which ones to make permanent.

“We need to get out of the way of the market unless there’s clear evidence that a tax expenditure spurs growth and creates jobs,” he said. “Every tax provision needs to prove it has a tangible benefit to our economy and society. If not, it doesn’t belong in the code.”

Increasing U.S. competitiveness 

Baucus also discussed potentially switching to a territorial tax system, which many countries have adopted to encourage businesses to not move overseas. Under a territorial tax system, only incomes earned within the U.S., for example, would be taxed.

Read more: White House pushes for corporate tax reform

Currently, the U.S. uses a worldwide tax system, which taxes incomes earned both in the U.S. and overseas, but provides foreign tax credits for companies that pay taxes overseas. However, these tax credits have become an incentive for companies to relocate their operations from the U.S. to another country with lower tax rates.

“When it comes to international tax rules, we seem to have the worst of all worlds. We haven’t kept up and it’s time to change,” said Baucus. “We have stuck with a worldwide system but in some ways we have weakened protections against shifting income to tax havens. As a result, the U.S. loses billions in revenues every year to tax havens.”

To recoup those billions in lost revenues, Baucus has proposed updating the corporate tax code “to prevent companies from shifting profits to tax havens where they haven’t earned any income.”

“Tax reform is a once in a generation opportunity. We can cement America’s preeminence,” he concluded.

 

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