Treasury nominee Lew calls tax reform top priority

WASHINGTON (Reuters) - President Barack Obama's choice to be the next Treasury secretary said on Wednesday that revamping the tax code is "at the very top" of his priorities, and he offered some olive branches to Republicans to achieve that goal.

Tax reform took center stage at the Senate Finance Committee's confirmation hearing for Jack Lew, Obama's nominee to replace Timothy Geithner. Lew told lawmakers that Obama is committed to a long-sought tax code overhaul and said that lowering all tax rates is possible if tough choices are made.

"It is possible. If we roll up our sleeves and are willing to do the hard work, we can both get our fiscal house in order and work on the rate structure," Lew, who has served as Obama's chief of staff and budget director, told the panel.

Republican Senator John Thune of South Dakota presented Lew with huge stacks of paper that were copies of the tax proposal offered by the Treasury Department under Republican President Ronald Reagan in 1986, intended to contrast with the slim pamphlets on a tax rewrite offered by Obama.

Lew responded that the 1986 overhaul, in its final form, did not resemble that original plan after it was hashed out by lawmakers over many months in congressional hearings in conjunction with the Treasury Department.

Still, Thune said the White House must play a larger role.

"This is not going to get done unless there is leadership out of the White House," he said. "There are lots of constituency groups out there that are very committed to the current tax code."

Republicans, Obama and his fellow Democrats say they back a revamp of the tax code, but the odds of achieving that are clouded by constant fiscal fights and conflict over whether new revenue is needed.

"In clearing out the tax code and broadening the base, there is room to raise the revenue that we need," Lew said.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, are working on parallel tax reform plans and have held hearings for more than a year.

Camp, who intends to propose legislation this year, created 11 bipartisan working groups this week to study different aspects of tax reform, including financial services and charitable giving, according to a committee source.

"It is a small step in the right direction," said a lobbyist for a trade group that backs a lower corporate tax rate. To have Democrats and Republicans "sitting down in the same room is progress."

The mantra of tax reformers is "lower the rate, broaden the base." The second part of that phrase involves politically painful choices.

"Broadening the base" means increasing the amount of income subject to taxation, which requires cutting tax breaks. Those tax breaks likely to be targeted include deductions for investment earnings, mortgage interest and charities, which are prized by industries and many individuals.

On the corporate side, it could mean curbing tax breaks for oil and gas companies and requiring companies to pay more taxes on offshore earnings.

Republicans pressed Lew on lowering the corporate tax rate, which is 35 percent - the highest among developed countries. Obama has backed trimming that top rate to 28 percent, while Lew said it would be challenging to get it down to the Republicans' goal of 25 percent.

Lew was also asked about moving to a "territorial" tax system favored by big business and Republicans, where most of corporate income earned offshore is exempt from U.S. taxes.

Under the current worldwide tax system, most income, wherever it is earned, is subject to U.S. tax, though a plethora of laws allow companies to defer or avoid taxes on these profits.

Lew reiterated Obama's call for a minimum tax on foreign profits, which the president revived on Tuesday in his State of the Union speech. But when asked if he was open to a more territorial-like system, Lew said, "there is room to work together."

(Additional reporting by David Lawder; Editing by Kevin Drawbaugh, Vicki Allen and Stacey Joyce)