White House Rethinks Tax Hikes

Charitable organizations are also worried. Indiana University's Center on Philanthropy said Wednesday that Mr. Obama's proposals to limit deductions and raise rates, if applied in 2006, would have reduced giving by nearly $4 billion, or 2.1%.

"I'd like to think that people give out of the goodness of their heart, but that tax deduction helps to loosen up the heartstrings," Nevada Democratic Rep. Shelley Berkley said Tuesday during a House Ways and Means Committee hearing.

Mr. Baucus said the administration should look instead for ways of covering the cost of health-care reform by finding more savings within the health-care system. He suggested limiting the tax advantages of employer-provided health care.

Mr. Geithner said the proposal on limiting deductions was intended to underscore the administration's credibility in fighting the deficit, and "to make sure the people understand that we need to do this in a way that's broadly fiscally responsible."

Still, Mr. Geithner repeatedly defended the proposal, saying it affects only about 1.2% of taxpayers. He added it would have only a modest negative impact on overall charitable giving. The Treasury secretary also noted that none of the administration's tax increases would go into effect until 2011 — presumably after an economic recovery is well under way.

The Obama plan would cap the value of deductions for families making $250,000 and up. Under current law, a $1,000 deduction is worth up to $350 for such taxpayers, because they can avoid tax rates of up to 35% on that income. The Obama cap on deductions would make the $1,000 deduction worth a maximum of $280.

Mr. Geithner also faced questions from lawmakers about how Mr. Obama's plan to let the top two tax rates increase to 39.6% and 36% in 2011 would impact small businesses. Republicans challenged Mr. Geithner's assertion that those increases wouldn't affect 97% of small businesses, saying the tax increases would put a new burden on businesses that create jobs.