Treasury Secretary Timothy Geithner explained the Obama administration’s budget and tax plans, and his handling of the financial industry bailout, to wary lawmakers in a congressional hearing.

During testimony Tuesday before the House Ways and Means Committee, Geithner discussed the budget’s priorities and tax provisions. Among other provisions, Geithner noted that the budget takes up where the recovery leaves off, cutting taxes for 95 percent of working Americans by making permanent the Making Work Pay tax credit of up to $400 for individuals and $800 for families. The budget provides additional tax relief by expanding the Earned Income Tax Credit for lower-income families and extends the American Opportunity Tax Credit that provides up to $2,500 toward higher education. “All of these are in the recovery plan that Congress enacted last month, but only in temporary form,” he noted in his opening statement.

The budget also expands the Saver’s Credit as part of Obama’s commitment to help Americans rebuild their savings. The budget also includes tax provisions to help small businesses. Recognizing that many small businesses are operated as sole proprietorships or through partnerships and other flow-through entities, it leaves the individual income tax rates at which these small businesses are taxed unchanged in 2009 and 2010. “By extending the current rate structure for families earning less than $250,000 after 2010, it ensures that 97 percent of small businesses will receive additional tax relief at that time or see their rates remain unchanged,” said Geithner.

He also noted that the budget would provide small business owners with a new zero capital gains rate on new investments in their businesses to help them plan for expansion and succession. In addition, the budget will help provide incentives for innovation and make the Research and Experimentation tax credit permanent.

However, Geithner was forced to defend other budget provisions that would raise taxes on wealthier taxpayers starting in 2011, when the economy is projected to have recovered. “It will be important for the nation to put in place policies that restore fiscal responsibility,” he said. At that time, the marginal rates for the top 2 percent of income earners will return to where they were during the 1990s before the Bush tax cuts. The budget would also reduce the ability of high-income taxpayers to deduct mortgage interest and charitable contributions.

Some proposals in the budget would tax the compensation paid to hedge fund managers, private equity partners and others at the same rates as ordinary income, and not as “carried interest.” The budget includes a proposal to require additional information reporting for rental property expense payments. The budget also seeks to close the “tax gap” by tackling tax shelters and the use of offshore structures and accounts by U.S. corporations and individuals to avoid U.S. taxes.

“Over the next several months, the president will propose a series of legislative and enforcement measures to reduce such U.S. tax evasion and avoidance,” said Geithner. He added that some of the proposals would focus on rules in the Tax Code that put businesses that invest and create jobs in the U.S. at a disadvantage. The administration will propose rules to reform U.S. corporations’ ability to defer foreign earnings and deter high-income individuals and corporations from using tax havens to avoid taxation.

However, Geithner insisted that the administration did not wish to raise taxes in the midst of what some economists are beginning to call a depression. “We propose no new revenue increases in our budget until we are safely on the road to recovery in 2011,” he said.

Rep. John Lewis, D-Ga., asked how the proposals would address inequities in the Tax Code. “A critical objective of the president is to restore fairness in the Tax Code and improve overall confidence in the policies of our country,” said Geithner. “This is not only a deep moral imperative to make our society more just, but it is good economic policy as well. It will allow a more equitable tax burden on the vast majority of Americans.”

Lloyd Doggett, D-Texas, asked about a bill he and Sen. Carl Levin, D-Mich., re-introduced Monday to deter companies and individuals from using offshore tax havens to hide funds or transfer income. The Stop Tax Haven Abuse Act was co-sponsored by Obama last year when he was still in the Senate, Doggett noted. “Those asking for corporate bailouts like Morgan Stanley and Bank of America should explain why it’s equitable for them to avoid taxes at the same time they are asking for so much tax money,” he said. He compared them to Bernard Madoff requesting aid from the Treasury. “He’s not asking for a bailout, at least not yet,” said Doggett. Geithner responded that the administration fully supports the legislation on offshore tax havens, and a broader effort to close the international tax gap.

In a heated exchange, Geoff Davis, R-Ky., took Geithner to task on a proposal in the budget to repeal last-in-first-out accounting, arguing that it would “devastate accounting,” and would harm distillery, aerospace and engineering companies in his state that are required to carry large inventories. “My concern is that the repeal of LIFO would have a devastating impact,” he said. “It reduces capital investment and job creation. We would be doing this regressively.”

Geithner responded that there is a “difference of opinion” on the subject among tax professionals, with some saying a repeal would be “beneficial for the country.”

“Some of those tax professionals have never run a factory,” countered Davis.

Ron Kind, D-Wis., asked about the tax proposals in the budget for small business, and Geithner went over some of the provisions outlined in his written opening statement. He also noted that the budget would provide greater lending to small businesses, especially community lending. He said the health care proposals would benefit both small and large businesses.

In another heated exchange, Peter Roskam, R-Ill., challenged Geithner’s own tax situation and questioned why he had not been assessed a penalty by the Internal Revenue Service for his failure to pay taxes on income he earned for his work with the International Monetary Fund. He said he had been stonewalled by an IRS official when he asked for information about what he called the “Geithner rule” and asked Geithner to waive his right to keep the information confidential.

Geithner pointed out that he had already provided much of the information. “I disclosed my full tax records to the administration and the Senate Finance Commitee and they disclosed the full results,” he said. “You can find very detailed documentation in the public record.” He said he would make sure that Roskam had the opportunity to hear the full details, but noted that the IRS also operates under constraints about revealing taxpayer information. Roskam reiterated his insistence that Geithner waive the constraints and asked, “Does the Geithner rule apply to me?”

“There is no Geithner rule,” said Geithner. “I am willing to talk to you and to my colleagues at the IRS. I was fully open and transparent, as was the committee, and that was in the public record. I need to talk to them about the constraints they face.” Roskam said, “It was a complete unwillingness to engage.”

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