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.'"