Obama, GOP clash over income tax rates, but some see hope for a breakthrough on business taxes

Treasury Secretary Jacob Lew dismissed efforts in Congress to overhaul the nation's tax laws by lowering the top income tax rate paid by individuals, saying Wednesday that Democrats and Republicans are too far apart to forge such a sweeping package.

Instead, Lew said, lawmakers should focus on simplifying taxes paid by businesses, an approach that is gaining traction on Capitol Hill.

"I don't think that there's any advantage in pretending that there aren't big disagreements on the individual tax side," Lew said at a forum hosted by the Brookings Institution, a Washington think tank. "We had a national debate just two years ago about the top rate. We're not looking at the kind of negotiation to go back to lower the top rate."

"While our views on individual tax reform may be far apart," Lew added, "there is a broad set of business tax reforms on which we should be able to agree."

Lew's comments came a day after President Barack Obama proposed raising taxes on the rich and using some of the revenue to finance tax breaks for the middle class. In his State of the Union address, Obama called his approach "middle-class economics."

Congressional Republicans panned the speech, saying there is no way they would use their majorities in the House and Senate to enact tax increases.

"All the president really offered (Tuesday) night was more taxes, more government, more of the same approach that has failed the middle class for decades," said House Speaker John Boehner, R-Ohio. "These just aren't the wrong policies, they're the wrong priorities."

On Wednesday, congressional Republicans said they were disappointed the Obama administration isn't pushing to simplify taxes for individuals. They noted that the vast majority of small business owners report business income on their individual tax returns.

Still, key Republicans said they would welcome more talks about business taxes.

"We're going to keep talking. We're going to exhaust the possibilities of seeing where the common ground exists and see if we can get something done," said Rep. Paul Ryan, R-Wis., chairman of the tax-writing House Ways and Means Committee.

"We do have big differences of opinion and our next step is to explore the areas of common ground if and where they exist," Ryan said. "I'd like comprehensive tax reform and I think it's important that you make sure that small businesses don't fall by the wayside. And that is very important to us, and so we'll see if we can complete the circle."

Democrats and Republicans alike agree that the nation's tax laws are too complicated for businesses and individuals, filled with too many exemptions, deductions and credits. The tax code is so complex that most Americans pay someone to do their taxes or they buy commercial software to help them file.

There is also widespread agreement that lawmakers should eliminate some targeted tax breaks and use the extra revenue to lower tax rates for everyone. However, there is no consensus on which tax breaks should go and whose tax rates should be cut.

The top federal income tax rate for individuals and families is 39.6 percent. Some Republicans in Congress would like to lower it to 25 percent.

"I don't think lowering the top individual rate is the way to grow our economy or create a better future for middle-class workers or for the country at large," Lew said.

Lawmakers could avoid tough decisions about taxes on individuals by focusing solely on businesses, said Jon Traub, managing principal at Deloitte's Tax and a former Republican staff director for the Ways and Means Committee.

But, Traub warned, a business-only approach also comes with political risks. For example, how would lawmakers explain to voters that Congress cut tax rates for businesses but not for individuals?

"For lots of politicians it's going to be hard to explain," Traub said.

Obama released a framework for business tax reform in 2012. In it, he called for lowering the top corporate income tax rate from 35 percent — the highest in the industrialized world — to 28 percent. Obama would finance the cut by eliminating dozens of targeted tax breaks for corporations.

The corporate income tax, however, only affects a small percentage of American businesses. More than 30 million tax returns a year report business income. But in 2013, only 2.2 million were traditional corporations that paid the corporate income tax.

The overwhelming majority were sole proprietorships, partnerships and other corporations in which the owners report their business income on their individual tax returns. These businesses, known as pass-throughs, would not benefit from a cut in the corporate income tax rate.

Lew said Obama's plan would help these businesses in other ways, such as easing accounting rules and enabling them to more quickly write off business expenses.

Key Republicans in Congress, however, are skeptical that Obama's proposals would do enough to help small businesses.

"Let's start the discussion on businesses, but it's difficult to follow that all the way through without having a real adult conversation about individual rates because so many of our businesses are filing over there," said Rep Kevin Brady of Texas, a senior Republican on the Ways and Means Committee.

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