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Jack Lew Reveals Rich Taxpayers Will Be on the Hook

By Deborah Solomon
February 13, 2013 3:40 PM EST

It's not a big secret that the White House views wealthier Americans as part of any budget deficit solution. Yet today's Senate confirmation hearing for Treasury nominee Jack Lew suggests the extent to which the Obama administration views rich taxpayers as the primary solution.

The big take away from the Lew hearing was that the White House sees tax reform as a top priority -- and that any tax change be done in a way that raises revenue.

"Tax reform is going to have to be done in an environment where we contribute to deficit reduction and, hopefully, lower rates," Lew said.

Yet, after some prodding, Lew acknowledged corporate tax reform could be done in a "revenue-neutral" way. In non-Washington-speak this means the administration would lower the corporate tax rate from today's 35 percent statutory rate without adding to the deficit by closing generous corporate loopholes and deductions that cost the U.S. hundreds of billions of dollars. 

Yet those tax breaks -- for oil and gas companies, corporate jets and yachts, and profits earned by hedge-fund managers -- are often cited as money that can be cleaved back to reduce the deficit. Indeed, President Barack Obama recently talked about achieving deficit reduction through tax reform "so that the wealthiest individuals and corporations can’t take advantage of loopholes and deductions that aren’t available to most Americans." 

If money from closing corporate loopholes is instead diverted to lowering the corporate tax rate to, say, 28 percent, how will the White House reduce the deficit?

Probably by ending tax breaks for individuals -- the deductions, exclusions and credits that millions of Americans rely on to help lower their tax bills but that starve the U.S. of $1 trillion in revenue annually.

This might not sound revelatory -- Obama was quite open about his plans to increase the tax burden for the wealthiest Americans who can "afford to pay a little more."

Yet scaling back popular individual tax breaks for things such as mortgage interest, charitable giving, state and local taxes, and employer-sponsored health care will be a high hurdle. In fact, it may be harder to take away those breaks than to end some corporate tax giveaways. 

Lew said as much when he acknowledged individual tax breaks "are very much the fabric of the way people live now." People buy homes and states increase taxes knowing there's a federal tax break on the other end. There may be a good rationale for limiting those tax breaks, but doing so won't be easy given their popularity.

Revenue-neutral corporate tax reform will also further widen the chasm between individual and corporate tax receipts. The Congressional Budget Office projects corporate income tax receipts will average 2.3 percent of gross domestic product over the next decade, while individual income tax receipts will average 9.3 percent. 

Of course, part of the deficit solution will have to come from slowing the growth rate of entitlement programs such as Medicare, Medicaid and Social Security. Obama signaled his willingness to deal on those issues during last night's State of the Union address. But, again, those changes will come at the expense of individuals -- by raising their taxes, scaling back benefits or some combination of the two.

Lew's comments on corporate tax reform appeared to mollify Republicans on the Senate Finance Committee and may help him win confirmation. Winning a workable deficit-reduction plan will be a tougher challenge.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

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