US Senate tax chief warns of dangerous fiscal path

Mon Jun 11, 2012 10:09pm IST

* 'Fiscal cliff,' tax reform go hand in hand-Baucus

* Democrat short on detail, hopes for bipartisan deal

By Kevin Drawbaugh and Kim Dixon

June 11 (Reuters) - The United States is on a "dangerous path" that could lead to a European-style fiscal crisis, warned the Senate's top tax legislator on Monday, while calling for more tax revenue and ending corporate incentives to shift profits and jobs overseas.

Democrat Max Baucus urged fellow lawmakers to resolve by the end of 2012 a host of "crucial spending and tax decisions" that will arise immediately following the Nov. 6 presidential and congressional elections.

The remarks by the chairman of the Senate Finance Committee were short on specifics and did not lay out a clear working agenda, but they reflected growing urgency on Capitol Hill.

"Much of the talk in Washington these days is focused on the so-called fiscal cliff," Baucus said in a speech to the Bipartisan Policy Center, a think tank.

"We need to address those crucial spending and tax decisions by the end of this year ... Deficit reduction must include both spending and revenues."

After the elections, a wave of fiscal issues will hit Congress, including the expiration of temporary tax cuts made under Presidents George W. Bush and Barack Obama, huge budget cuts ordered last year, and what to do about various tax breaks.

Decisions on these and other questions will come at a time when the United States, struggling to grow out of a financial crisis and recession, has run federal budget deficits topping $1 trillion for three straight years and is on track for a fourth.

At the same time, protracted fiscal crises in Europe are casting a shadow over the sluggish U.S. economic recovery.

Action on a deficit-reduction plan and tax code overhaul has been put off over the past two years as Democrats and Republicans have been unable to overcome deep divisions, with Democrats seeking tax increases on the wealthy and Republicans focusing on domestic spending cuts without any tax increases.

"We're on a dangerous path. If we don't act, it could lead towards fiscal crisis like some European countries," Baucus said.

'NO ESCAPE'

Echoing other Democrats' views, he said any tax code rewrite must raise revenue, a position that is an odds with the current Republican negotiating stance. "Mathematically there is no escape," Baucus said, without laying out any details.

Obama, a Democrat, and lawmakers from both parties say they favor cleaning up the tax code in a broad overhaul, which most define as cutting marginal tax rates while trimming tax breaks that favor individual groups and industries.

House Republicans are backing a type of "fast-track" procedure that would impose tax reforms if Congress failed to act before a set deadline, though they are still working out the details. Baucus said that option should be on the table.

"Any tax reform plan must be developed with a sound budget in mind that reduces deficits and debt. But the deficit is not our only hurdle - not by a long shot. Since the last major tax reform in 1986, the world has changed drastically. Our tax code hasn't kept up, and now it's acting as a brake on our economy."

Baucus, a moderate Democrat from Montana, has been holding hearings for more than a year on the topic but has not spoken extensively on it. He is up for re-election in 2014.

Several experts said they were encouraged that Baucus did not lay out clear markers, suggesting he is keen to forge a bipartisan deal. "People shouldn't sit around making lists of what they would not do," said Bill Thomas, former chairman of the U.S. House of Representatives tax writing panel.

A revamp of the code would also include big changes to corporate taxes.

Baucus said that under the current system, protections to prevent companies from shifting income to tax havens to avoid taxes have worsened, and he said more needs to be done to keep jobs in the United States.

"The U.S. loses billions in revenue every year to tax havens," Baucus said.

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