Ending some US tax breaks would allow 4-pct cut in rates - report

By Kim Dixon

WASHINGTON, Oct 12 (Reuters) - Repealing most of the U.S. tax code's major itemized deductions - like those for mortgage interest and charitable donations - would allow for a 4 percent cut in income tax rates without adding to the federal deficit, according to congressional tax researchers.

The analysis from the non-partisan congressional Joint Committee on Taxation is timely ahead of the Nov. 6 presidential election. Republican challenger Mitt Romney has promised a 20 percent income tax cut for all Americans but said the move would be revenue-neutral.

President Barack Obama, fellow Democrats and some academics say Romney's approach is not mathematically possible without scrapping popular tax breaks that benefit the middle class.

Joint Committee on Taxation (JCT) Chief of Staff Thomas Barthold wrote in the letter to lawmakers that he conducted an "experiment" after meeting with members of the Senate Finance Committee about tax reform in September.

JCT eliminated many tax deductions to see what would result, except it left intact two large exemptions - the ones for employer-sponsored health insurance and for retirement accounts.

"The revenue-neutral tax reform package outlined ... would permit a four-percent decrease in all ordinary income tax rates," Barthold said in the Oct. 11 letter to Senate Finance Committee Chairman Max Baucus, a Democrat, and Senator Orrin Hatch, the panel's top Republican.

The tax exclusion for employer-provided healthcare costs the government about $160 billion in revenue annually, and the break for workplace retirement accounts is about the same.

The mortgage interest break costs about $100 billion; the exclusion for contributions to the government-run Medicare program for seniors about $76 billion; and the tax break for capital gains costs about $70 billion, rounding out the five most expensive tax expenditures, according to JCT.

Republicans blasted the report because of these limitations.

"The JCT study is an experiment and does not represent any tax reform proposal on the table," a spokeswoman for Hatch said.

Leaders of both parties say they back a revamp of the convoluted U.S. tax code, in an effort to lower some tax rates, paid for by scrapping some deductions.

The analysis also raised the tax rate for capital gains and dividends, repealed the interest exclusion for state and local bonds and included a repeal of the alternative minimum tax, a parallel tax for the rich to ensure they pay some tax.

(Reporting by Kim Dixon; Editing by Kevin Drawbaugh and Paul Simao)