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House GOP Budget to Target Tax Rates

By Naftali Bendavid

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Washington, March 19, 2012 | comments

House Republicans, seizing on what they hope is a potent campaign issue in the midst of a muddled political and economic landscape, will introduce a 2013 budget Tuesday that cuts tax rates and provides for two individual brackets of 10% and 25%.

The budget would end the Alternative Minimum Tax, which was originally aimed at the wealthy but which ensnares a growing number of middle-class taxpayers each year. The plan would nearly eliminate U.S. taxes on American corporations' earnings from overseas operations.

The proposal, to be offered by Rep. Paul Ryan (R., Wis.), who has become the Republicans' leading figure on budget issues, has little chance of becoming law soon. While likely to be welcomed by House GOP rank-and-file members, it would be rejected by the Democratic-controlled Senate.

But with Republicans struggling to settle on a presidential nominee and a coherent campaign theme, party leaders hope the easy-to-understand tax-cut proposal will give Republican candidates a clear and popular message.

"We don't expect to make law this year, but we expect to give the country an alternative choice for the future," Mr. Ryan, who chairs the House Budget Committee, said in an interview. "We're going into this election with a specific plan and showing how we could realize it and get it done."

The document was drafted with input from Rep. David Camp (R., Mich.), who heads the tax-writing Ways and Means Committee and has long pushed for a tax overhaul. "We think it's very important to have a clear message on jobs and the economy," Mr. Camp said. "The code is too costly, too burdensome, and it's hurting job creation, so we think we should take action."

Democrats see the tax proposal as an attempt to deflect attention from the more controversial parts of Mr. Ryan's budget, such as a Medicare overhaul and a decision to set 2013 spending levels at a lower figure than that agreed to in the debt-limit deal last August.

"Republicans are on a maddening push once again to end Medicare and raise health-care costs for seniors, while giving more special tax breaks to big oil companies and millionaires," said Rep. Steve Israel (D., N.Y.), who coordinates the House Democrats' campaigns.

Mr. Ryan caused a furor last year by proposing to change Medicare from a program in which the government pays directly for health care into a "premium support" program for those currently 55 or younger. Medicare would subsidize beneficiaries' premiums as they bought private insurance.

Democrats hammered the GOP for seeking to unravel a longstanding program that ensures the elderly get health care. Since then, Mr. Ryan has teamed up with Sen. Ron Wyden (D., Ore.) to propose an alternative that would let beneficiaries use their premiums to buy into traditional Medicare as well as private insurance.

Congressional budgets have historically focused on setting spending levels for the coming year, but Mr. Ryan has used them as a vehicle to send messages about how he believes the country's fiscal health should be restored.

This year, Republicans are battling behind the scenes over the level of discretionary spending—which excludes formula-driven programs such as Social Security and Medicare—in fiscal year 2013, which starts Oct. 1. Democrats and Republicans agreed on a figure of $1.047 trillion after a hard-fought negotiation last August, but GOP conservatives are pushing for a lower level, and Mr. Ryan is likely to set a figure of $1.028 trillion, aides say.

The current tax system has six individual tax brackets, with a top marginal rate of 35%. The proposal to replace it with just two brackets, with rates of 10% and 25%, echoes proposals by some GOP presidential contenders. Former Pennsylvania Sen. Rick Santorum would reduce rates to 10% and 28%; former Massachusetts Gov. Mitt Romney would cut current rates by one-fifth; and former House Speaker Newt Gingrich and Texas Rep. Ron Paul support some form of flat tax.

But because the Ryan-Camp plan doesn't specify the income levels that would fall into the two brackets, an independent assessment of its impact is impossible.

GOP leaders say they will keep the government's tax income from plunging by killing an array of tax breaks. But they didn't specify which ones, prompting criticism that they were promising low tax rates without saying how they would be paid for.

The Ryan-Camp plan would entirely scrap the Alternative Minimum Tax, or AMT, which was designed to prevent high earners from using so many deductions that they end up paying negligible taxes.

The AMT isn't indexed for inflation, so it has been sweeping in a growing number of middle-class taxpayers. In recent years, Congress has blocked the AMT from taking full effect.

The new budget also would lower the top corporate tax rate to 25% from 35% and plunge into a fierce debate about how to tax companies' overseas operations. Currently, U.S. companies pay the tax rate of the country where the outpost is located and then, if they bring those profits home, often pay some U.S. taxes as well. Under the Ryan-Camp proposal, companies essentially would pay just the tax rate of the country where the profits are earned.

Republicans say the current system unfairly taxes corporations twice, hurts their competitiveness and discourages them from re-investing in the U.S. The Ryan budget would cut U.S. taxes on overseas earnings to an unspecified rate, though the House Ways and Means Committee has previously suggested 5.25%.

Critics say such a move would prompt American companies to avoid taxes by moving operations overseas even faster than they already are, harming American workers and reducing investment in the U.S.

The Republicans' proposals contrast sharply with the approach taken by Democrats, who argue that the U.S. tax code favors the rich over the middle class. Democrats have offered such proposals as a surtax on millionaires and a "Buffet Rule" ensuring that the wealthy don't pay a lower rate than ordinary workers.

Even before the release of Mr. Ryan's budget, Democrats complained that it gave short shrift to the middle class. "Republicans have made their priorities crystal clear once again," Mr. Israel said.

Mr. Ryan responded that Democrats' plans would hamper economic growth while his approach would encourage it.

Many congressional Democrats agree with Republicans that the U.S. tax code needs to be rewritten. Both sides decry the thousands of tax breaks that have been written into the code, often at the behest of industries with lobbyists.

The pressure to move quickly is increased by the looming expiration of the Bush-era tax cuts next year. While it would be difficult to enact a law as ambitious as a sweeping tax overhaul in an election year, both sides say next year could provide a window.

The Ryan budget is therefore less a legislative proposal than an opening bargaining position for a conversation likely to stretch into next year. The fact that it is a joint production of Messrs. Ryan and Camp underlines sponsors' hopes that it becomes a unified Republican stance.

The battle over 2013 spending levels has been similarly fierce. Under last year's Budget Control Act, reached last August, the two parties agreed on a level of $1.047 trillion for discretionary spending,

Some conservative Republicans say that number is too high and are pushing for a lower figure. The GOP budget is likely to settle on a figure of $1.028 trillion, aimed at appeasing the party's conservative faction, who wanted a lower amount, without unduly alienating Republicans who wanted to stick with the $1.047 trillion figure.

Senate Democrats warned Monday that dropping that figure could risk another government shutdown.

"We believe that ignoring the BCA represents a breach of faith that will make it more difficult to negotiate future agreements," wrote Sens. Max Baucus of Montana and Daniel Inouye of Hawaii, in a letter to House leaders. "Rather than trying to tear down the BCA, we should be holding it up as an example of what can be accomplished if we are willing to set aside our differences and work hard to find bipartisan solutions to our nation's challenges."

-John D. McKinnon contributed to this article

View online at The Wall Street Journal here.

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