Slim Chance of U.S. Tax Code Change With This Congress

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WASHINGTON -- Everyone in Washington celebrates the idea of a tax overhaul. President Barack Obama embraced it in his State of the Union address. John A. Boehner, the speaker of the House of Representatives, called it a top legislative priority. The House Ways and Means Committee and the Senate Finance Committee are convening bipartisan working groups, and lobbyists are licking their chops.

To the president and Democrats, a tax overhaul is an opportunity to create a more equitable tax code while bringing in more revenue to reduce the deficit; to Republicans, it is about cutting marginal rates, especially the top ones, to promote economic growth; to lobbyists, it is about padding their wallets.

It is a mirage, say a number of serious participants who would like to see something achieved. The chances of any substantial overhaul in this Congress are slim to none.

The U.S. tax code is riddled with special-interest provisions, economic inefficiencies and inequities. Yet every preference enjoys either popular support or influential backing from a vested interest.

This always makes the politics of tax changes daunting; in reshaping a code that hands out more than $1 trillion a year in preferences, there would be winners and losers. Inevitably, it is the potential losers who bring the most passion to the deliberations.

What makes an overhaul next to impossible today is the added burden of total polarization: Democrats insist that any changes must result in net revenue gains; Republicans say any measure must be revenue neutral. Both sides agree that changing the way taxes are allocated is politically perilous and can be done only with bipartisan support.

That rules out any sweeping change, despite the genuine support of both the president and the chairman of the House Ways and Means Committee, Dave Camp, Republican of Michigan.

It is conceivable, if unlikely, that a deal could be struck to replace the current across-the-board spending reductions under sequestration with some additional revenue, along with cuts to entitlements. That could open the way for a modest tax overhaul that slightly lowered rates and cut a few preferences.

The goals of strong advocates for change, to cut the top rate by as much as a third and to slash loopholes, run into current realities.

"Democrats just raised the top rate, and Republicans say no more tax increases," says William G. Gale, a tax expert at the Brookings Institution.

It might be a little easier to take up the corporate tax code because there is a general consensus that changes should be revenue neutral. Mr. Camp wants to lower the top corporate rate to 25 percent from 35 percent; the administration wants to cut it to 28 percent.

Here, too, the trade-offs are tough. Even if the controversial foreign source issue is resolved -- the largest corporate preference is the ability of U.S.-based multinationals to defer taxes on income abroad -- with some acceptable global minimum tax, powerful sectors like agriculture, mining and real estate could face higher taxes.

The same could apply to partnerships, a sector that includes law firms and financial companies with clout. (Mr. Camp floated a surprising proposal last week that would curtail the ability of some partnerships, like hedge funds and private equity firms, to allocate income and tax benefits among their members.) On the individual side, the demand for more revenue means the losers outweigh the winners. Yet experience shows that most of the biggest preferences -- charitable write-offs, the deductions for home mortgage interest payments and state, local and property taxes, and the exclusion of health insurance benefits -- are close to untouchable.

Republicans offer several ways to circumvent these obstacles. One is to put a ceiling on overall write-offs instead of attacking individual subsidies. The problem with that idea, as former Governor Mitt Romney of Massachusetts discovered when he made a vague campaign pledge along these lines, is that it would hit taxpayers hard who make $100,000 to $200,000 a year -- and who do not consider themselves rich, and vote heavily. The other impediment is the Republican argument that there is no need for net new taxes because an effective overhaul would promote economic growth and bring in more revenue. The evidence for that is flimsy.

All right, proponents still say, some periodic changes to the code are essential, and Washington overcame similar obstacles with the sweeping Tax Reform Act of 1986. It is true that rates were lowered and the base was broadened. However, it was financed with huge increases in corporate and capital gains taxes, both of which would be off the table today for Republicans and more than a few Democrats.

In 1985-86, there also was real bipartisan cooperation among a Republican president, Ronald Reagan; Treasury Secretary James A. Baker III; and Democratic lawmakers like Representative Dan Rostenkowski and Senator Bill Bradley. Even then, it took almost two years, and on several occasions the effort very nearly died. No trace of that spirit exists today.

Still, a major discussion of changes to tax policy this year would be healthy. It could be educational, underscoring the deficiencies and unfairness of the code and the tough trade-offs required to make it better. That could lead to gradual changes and improvements at the margins.

It probably would also be a boon for the Washington economy, as special interests rushed to hire any lobbyist with a pulse to protect their benefits.

nation

This article originally appeared in The New York Times.


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