WASHINGTON (Reuters) - The United States is on a “dangerous path” that could lead to a European-style fiscal crisis, the Senate’s top tax legislator warned 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 after the November 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.
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.
“Deficits and debt are not just a spending problem,” Baucus said in a speech to the Bipartisan Policy Center, a think tank. “We simply don’t raise enough revenue.”
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 last 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.
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.
Baucus said he has been in bipartisan talks to find a way forward on an end-of-the-year deal to avoid the fiscal cliff. Meetings are focused on two proposals with some bipartisan backing, including one recommended by the president’s fiscal commission, known as Simpson-Bowles.
While Simpson-Bowles failed to garner enough backing to trigger a Congressional vote, and Obama did not embrace it, comments by Baucus suggest it may be gaining new currency.
Baucus said that plan and one offered by the Bipartisan Policy Center were “rough starting points that people tend to agree with.”
The Simpson-Bowles plan outlined several options, including one trimming the current tax brackets from six to three and cutting the top 35 percent individual tax rate to between 24 percent and 27 percent.
That proposal also limits the mortgage interest and health care deductions, converting them to credits.
Echoing other Democrats’ views, Baucus said any tax code rewrite must raise revenue, a position that is at odds with the current Republican negotiating stance. “Mathematically there is no escape,” Baucus said, without laying out any details.
Separately, former Republican House Speaker Dennis Hastert and former House Democratic Majority Leader Dick Gephardt called for a bipartisan deal on how much revenue the government should raise. After that, tax rates would be sketched in to fit the amount of revenues needed.
“Only after a framework has been set, Congress should debate the rates themselves,” they said in a Financial Times opinion column on Monday.
House Republicans have called for cutting individual and corporate rates from top rates of 35 percent to 25 percent.
Republicans are also backing a type of “fast-track” mechanism that could force action on 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 considered.
The moderate Democrat from Montana has been holding hearings on tax reform for more than a year. 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 eager 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 House tax writing panel.
The U.S. corporate tax system is known as a “worldwide” system, requiring companies to pay taxes on income earned abroad that is brought back to the United States. Businesses say such a system actually encourages them to move operations offshore and keep profits abroad to avoid tax.
Many companies advocate a “territorial” system, where income earned outside the United States is free of U.S. tax and subject only to the local jurisdiction’s tax.
Baucus, in his speech, noted that other countries “have shifted to territorial systems to keep their companies from moving overseas. And they have tougher rules against shifting profits overseas.”
He said that, under the worldwide system, “we have weakened protections against shifting income to tax havens.”
That cheered investment analyst Jim Lucier, who said it seemed Baucus was seeking middle ground on corporate taxes.
“He is clearly trying to straddle the differences,” Lucier said.
Editing by Eric Beech, Gunna Dickson and Tim Dobbyn