Deficit talks will test GOP focus on tax rates

WASHINGTON (AP) — Republican leaders say the government can raise tax "revenues" without raising tax "rates." But they have

yet to detail how they would pursue it.

The distinction might mean little to

Americans who end up with larger tax bills even if their tax rates don't

change. This

politically tricky trade-off is about to take center stage in

negotiations over how to reduce the federal deficit and avoid

going over the "fiscal cliff" in just seven weeks.

The White House says wealthy Americans must

pay a higher tax rate to help produce more revenue to lower the deficit.

Congressional

Republicans refuse, and many want tax rates to fall instead. But

they say they are open to other means of higher tax collections,

which might include limits to itemized deductions.

About one-third of U.S. households itemize

deductions rather than take the standard deduction. Some of these

itemized deductions,

such as the one for mortgage interest payments, are popular and

deeply ingrained in the American culture.

Many Republican lawmakers are tip-toeing around the issue. But Sen. Saxby Chambliss, R-Ga., warns of possibly huge changes

affecting millions of people.

Chambliss told the Atlanta Journal

Constitution that federal revenues can be increased significantly

without raising tax rates,

by limiting deductions. But he noted the popularity of the most

important deductions, which are granted for mortgage interest,

charity gifts and health care costs.

"It can be done, but it's going to require

the elimination of almost all— if not all — tax deductions and tax

credits," Chambliss

said. "That's going to be difficult."

Congress has raised and lowered income tax rates many times over the past few decades. Currently, a married couple pays 15

percent on taxable income between $17,400 and $70,700. Four higher tax rates apply to incomes beyond that.

The rate a couple pays is only one factor in their overall tax bill. Deductions or credits for child care, charitable giving,

medical costs and other expenses can make big differences.

President George W. Bush achieved major cuts

in income tax rates in 2001 and 2003. Since then, GOP lawmakers have

taken increasingly

tough stands against letting those cuts expire — as they now are

scheduled to do at the end of the year.

President Barack Obama campaigned this year on a pledge to end the Bush-era tax breaks for families making more than $250,000

a year. The White House said Friday he will veto any deficit-reduction package that fails to do so.

Republican leaders say they are just as adamant that no one's tax rate rises.

Unless one side yields, Congress and the

White House seem unlikely to agree on a new deficit-shrinking plan of

tax hikes and

spending cuts. Without an agreement, a huge package of spending

cuts and tax increases, which both parties dislike, will take

effect in the new year.

The debate highlights Republicans'

ideological emphasis on income tax rates, a topic they discuss far more

than other tax

matters, such as the Social Security payroll levy. The question of

tax rates has achieved "holy grail" status, said veteran

GOP strategist Terry Holt. One reason, he said, is that raising or

lowering deductions is "considered more overtly social

engineering, the government rewarding certain behaviors."

Chris Van Hollen, the House Democrats' top

Budget Committee member, said Republicans' "obsession with small changes

in tax

rates goes back to this pixie-dust theory that if you cut tax

rates for wealthy people, it pays for itself" through job creation.

"That theory went bust," he said.

Republican presidential nominee Mitt Romney

briefly suggested limiting itemized deductions to $17,000 a year. The

plan would

have raised $1.7 trillion over the next decade, according to the

non-partisan Tax Policy Center. But it would have increased

taxes on millions of people, including about 27 percent of

households making $50,000 to $75,000 a year.

Now, GOP congressional leaders are suggesting that limits to itemized deductions might be acceptable. But they have offered

few details.

The tax code includes "all kinds of deductions, some of which make sense, others don't," House Speaker John Boehner, R-Ohio,

said last week. "By lowering rates and cleaning up the tax code, we know that we're going to get more economic growth."

Van Hollen said Democrats will demand specifics.

U.S. taxpayers enjoy about $1.2 trillion in

tax breaks each year, including credits, deductions and exemptions that

lower

their federal tax bills. More than a quarter of those tax breaks

go to households making above $1 million. About a third of

them go to households making more than $500,000, according to the

Tax Policy Center.

Lawmakers could raise a significant amount

of money by reducing or eliminating some tax breaks for the wealthy —

without raising

tax rates. But tax experts warn that it wouldn't be easy because

all of those tax breaks are important to powerful interest

groups.

William Gale, a former economic adviser to

President George H.W. Bush, notes that while tax rates have gone up and

down over

the years, federal tax breaks for owning a home, donating to

charity, raising children and paying local taxes have endured.

Why? If lawmakers try to reduce tax breaks

for owning a home, the housing industry complains. If they try to reduce

the deduction

for making a charitable donation, charities, universities and

other nonprofit groups complain.

"Historically, it has never been easy, which is why those tax breaks are still in the code," said Gale, a senior fellow at

the Brookings Institution.

Obama has repeatedly proposed limiting itemized tax deductions for high-income families. But Congress has largely ignored

his plan, even when Democrats controlled the House and the Senate.

Currently, the top income tax rate is 35 percent on taxable income above $388,350. If a person making more than that gives

$1,000 to charity, he can reduce his taxes by $350. Under Obama's plan, the same taxpayer would save only $280.

In general, economists say it is better to

raise additional revenue by doing away with tax breaks rather than

raising tax

rates, said Roberton Williams, a senior fellow at the Tax Policy

Center. Raising tax rates can be a disincentive to working

harder, because the person gets to keep less of each extra dollar

he earns.

Eliminating tax breaks can have other

effects. Reduce the mortgage interest deduction and people will buy

smaller homes, Williams

said. Reduce the charitable deduction and they may donate less

money.

Bob Bixby of the Concord Coalition, which advocates balanced federal budgets, said lawmakers must spell out exactly which

deductions they want to trim if any deficit-reduction compromise is to occur.

"It's important for people to start talking about those by name," Bixby said, "and not just about 'closing loopholes.'"