Capping tax breaks deserves a closer look as part of aresolution to the so-called fiscal cliff and an overhaul of the taxcode, said Senate Finance Committee Chairman Max Baucus.

Similar-sounding ideas, such as a percentage limitation or amaximum dollar amount of deductions, can have disparate effects ontaxpayers, the Montana Democrat said yesterday in an interview withBloomberg News.

“It affects different groups differently and that all has to bebetter understood,” said Baucus, 70, whose committee hasjurisdiction over taxes and entitlement programs. “In theory, youcan do anything you want with numbers. I don't mean to say thatfacetiously. I just mean it because it's true. There are all kindsof permutations here, so long as it's balanced, so long asupper-income Americans are more of the solution.”

Placing a cap on deductions and other tax breaks, floated byRepublican presidential candidate Mitt Romney, could be a potentialbridge between Democrats who want top earners to pay more andRepublicans who want to avoid a tax rate increase.

Democrats have closed off some of the room left open earlier inthe week for that compromise. Baucus and Treasury Secretary TimothyF. Geithner both said yesterday that tax rates on top earners mustgo up.

President Barack Obama will open talks with lawmakers byreiterating the plan from his fiscal 2013 budget, which called for$1.6 trillion in additional revenue from high-income taxpayers,White House spokesman Jay Carney said yesterday. That's twice theamount that House Speaker John Boehner, an Ohio Republican,discussed in negotiations last year.

The fiscal cliff, a $607 billion combination of automaticspending cuts and tax increases, is scheduled to take effect inJanuary. Many lawmakers, including Baucus, are both trying to avertthe short-term fiscal austerity of the cliff and achieve longer-rundeficit reduction.

“The math does not work without upper-income Americanscontributing more than they have in the past,” Baucus said. “Andsecond, it's the right thing to do because otherwise the wideninggap will become wider. And that's not good for the country.”

If Congress doesn't act, taxes on ordinary income, capitalgains, dividends and estates will increase, pushing the top taxrate to 39.6 percent from 35 percent. Automatic spending cuts willtake effect and the economy will probably go into a recession inthe first half of 2013, according to the Congressional BudgetOffice.

Market Reaction

The CBO estimates that averting the cliff would protect 3.4million jobs. The Internal Revenue Service warned yesterday thatthere would be “serious repercussions” for the 2013 tax filingseason scheduled to start in January if Congress fails to addressissues that affect 2012 tax returns.

Stock and bond markets have been reacting to the possibilitythat Congress may not reach an agreement on spending and taxes.Treasury yields show inflation expectations fell to a two-monthlow, as the difference between yields on 10-year notes andsame-maturity Treasury Inflation Protected Securities, a gauge oftrader expectations for consumer prices over the life of the debt,narrowed to 2.40 percentage points yesterday, the narrowest gapsince Sept. 13.

The Standard & Poor's 500 index declined 5.5 points, or 0.4percent, to close at 1374.53 yesterday in New York.

In an opinion article in today's Wall Street Journal, LloydBlankfein, the chairman and chief executive officer of GoldmanSachs Group Inc., called on the Obama administration and thebusiness community to come together in a “spirit of compromise andreconciliation.”

“There is more than a trillion dollars of cash that is sittingon the balance sheets of U.S. nonfinancial companies,” Blankfeinwrote. “With certainty about tax rates, companies will increasetheir capital expenditures (currently at anemic levels),contributing to a virtuous cycle of jobs and growth.”

Also critical, he said, is restoring confidence in publicfinances through a program of spending cuts, entitlement reform andrevenue increases. He said that tax increases for the wealthiesttaxpayers are appropriate as long as they are accompanied by“serious cuts in discretionary spending and entitlements.”

Democrats, including Obama, want to extend only the tax breaksaffecting income of individuals below $200,000 and married couplesbelow $250,000. Republicans want to extend all of the tax cuts fora year and then overhaul the tax code.

Biggest Benefits

Compared with a rate increase, any limit on tax breaks woulddisproportionately affect people who use the biggest benefits inthe code — those for charitable contributions, employer-sponsoredhealth insurance, state and local taxes and mortgage interest.

The state and local tax break, for example, benefits people wholive in high-tax states such as New York, New Jersey andCalifornia, which traditionally vote Democratic. Those demographicsmake deduction caps politically difficult for the party.

Romney suggested a cap on deductions and credits that would beset at $17,000, $25,000 or $50,000. Martin Feldstein, an adviser toboth Romney and President Ronald Reagan, has suggested cappingdeductions at 2 percent of adjusted gross income.

Obama, who will hold his first post-election news conferencetoday, has proposed capping tax breaks so that taxpayers in higherbrackets can claim them as if they were in the 28 percent bracket.That proposal, which first appeared in his budget in 2009, didn'tadvance in Congress under either Democratic or Republicancontrol.

Republican Senator John Thune of South Dakota said Geithner'scomments may signal “a very dangerous game” the administrationwould be playing if it demands a tax-rate hike “in a downeconomy.”

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

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

An ultimatum for higher tax rates is risky at the start ofnegotiations because “they know that raising taxes is really anon-starter around here” for Republicans, said Thune, a member ofthe Finance Committee.

'Thoughtful Fashion'

Representative Earl Blumenauer, an Oregon Democrat, saidlawmakers should be open to the idea of caps and breaks, notingthat it was one of the few specifics Romney offered.

“It's important to be able to explore it in a thoughtfulfashion,” he said.

In the interview, Baucus also said that he is still assessingwhether the economy will need some short-term stimulus in 2013.

Part of the fiscal cliff is the expiration of atwo-percentage-point cut in the payroll tax, and lawmakers haveshown little enthusiasm for extending it.

“I want to see the numbers,” Baucus said. “Where's the economy?Where's Europe? Where's China? What are economists saying?”

Baucus, who has been exploring ways to overhaul the tax code,said the resolving the fiscal cliff could include a “down payment”that would lead to work on the issue in 2013.

“A down payment might make good sense,” he said. “It probablydoes make good sense because tax reform is going to take longerthan the time we have remaining this year. It's going to have to bekicked over into next year.”

Bloomberg News

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