Capping deductions wouldn’t cut deficit, Geithner says

Capping deductions wouldn’t cut deficit, Geithner says

Treasury Secretary Timothy F. Geithner said the U.S. must raise personal income-tax rates on the highest earners to reduce long-term budget deficits because capping deductions won’t raise enough revenue.

President Barack Obama is “not prepared to extend the upper-income tax cuts,” Geithner said yesterday at the Wall Street Journal’s CEO Council meeting in Washington. “There’s obviously universal support for the middle-class tax cuts. Doing that would remove the greatest source of anxiety and much of the greatest risk in the fiscal cliff.”

Geithner comments set a marker between the administration and Republican lawmakers as they prepare for talks on an agreement to reduce long-term budget deficits and to avoid $607 billion in spending cuts and tax increases set to take effect Jan. 1. The Congressional Budget Office has forecast that the so-called fiscal cliff would push the economy into a recession next year.

Obama has said repeatedly that he won’t extend the Bush-era tax cuts for the highest-income Americans and his spokesman, Jay Carney, on Nov. 9 said the president would veto “any bill” that extends the current rates for the top 2 percent of wage earners.

The same day, House Speaker John Boehner, an Ohio Republican, cited public support for the re-elected House Republican majority and said tax rates must not go up.

Tax-Code Overhaul

Still, Boehner has emphasized opposition to higher tax rates, rather than talking about higher taxes or higher revenues. He has endorsed the idea of higher revenue through an overhaul of the tax code without saying explicitly whether he would support a tax increase or the elimination of tax breaks without a corresponding rate cut.

“Shoring up entitlements and reforming the tax code — closing special-interest loopholes and deductions, and moving to a fairer, simpler system — will bring jobs home and result in a stronger, healthier economy,” the speaker said on Nov. 7.

Geithner yesterday cast doubt on the idea that closing loopholes or limiting deductions could raise enough revenue.

“When you take a cold, hard look at the amount of resources you can raise from that top 2 percent of Americans through limiting deductions, you will find yourself disappointed relative to the magnitude of the revenue increases that we need,” Geithner said.

In the Senate, Republicans and Democrats also squared off.

Orrin Hatch, a Utah Republican, said in an interview yesterday that higher tax rates are “not going to be” part of any deal.

‘Progressivity Test’

Kent Conrad, a North Dakota Democrat and chairman of the Senate Budget Committee, disagreed. “If you’re going to meet the progressivity test, if you’re going to raise the revenue, it can’t just be loophole closings,” he said in an interview.

Still, Geithner said he is optimistic that Republicans want to reach an agreement.

“It’s very encouraging that you’ve seen the leadership just in these last couple of days recognize that we’re going to have to generate a modest amount of additional revenues from high-income Americans,” he said. After conceding that “revenues are going to have to go up on the most fortunate Americans, why would you decide to take the economy over the cliff, put the economy through the damage that’s going to cause?”

Obama is holding meetings with labor and business leaders at the White House this week. The talks are intended to shore up the support for his plan before Nov. 16 discussions with Boehner, Senate Minority Leader Mitch McConnell, Democratic House Minority Leader Nancy Pelosi and Senate Majority Leader Harry Reid.

Raising Rates

Obama on Nov. 9 reiterated his call for Congress to pass an immediate extension of existing tax rates for middle-income Americans and to let rates rise to 39.6 percent from 35 percent for individuals with income of about $200,000 annually and married couples earning more than $250,000.

Republican Senator John Thune of South Dakota said Geithner’s comments may signal “a very dangerous game” the administration would be playing if it demands a tax-rate increase “in a down economy.”

“There is a real risk” that higher taxes would “impede or hurt economic growth,” he said in an interview.

“Revenues are starting back up again” after declining “during the economic collapse,” so “it would be a big mistake to now turn back and raise rates and put at risk and in jeopardy the economic recovery we hope is under way,” Thune said.

Debt Ceiling

The deficits add to national debt, which will most likely hit the $16.4 trillion limit at the end of December, with extraordinary measures enabling the U.S. to meet its obligations “until early in 2013,” the Treasury Department said Oct. 31.

Geithner said budget deficits should be brought down gradually to below 3 percent of gross domestic product to avoid damaging the prospects for economic growth.

Geithner, 51, will stay in his post through Obama’s inauguration on Jan. 21 as the administration and Congress negotiate, the White House’s Carney said Nov. 9. Geithner had said before the election that he doesn’t plan to stay at the Treasury for a second Obama term.

Source: Bloomberg