Monday, July 25, 2011

Obstacle Course Awaits Congress in Quest for Simpler Tax Code

By Richard Rubin and Steven Sloan

The allure of a simpler, more efficient tax code that could fuel economic growth presents a tantalizing possibility for U.S. lawmakers. The path to that goal is littered with political and legislative obstacles.

Even if President Barack Obama and House Speaker John Boehner had agreed to pursue a tax code overhaul as part of a deal to raise the debt ceiling, completing such an effort would require sustained bipartisan cooperation on an issue that deeply divides Republicans and Democrats.

Congress hasn’t rewritten the U.S. tax code since 1986, and that isn’t for lack of trying. The problem extends beyond disagreements about the proper size of government and the role of government in fighting income inequality. The difficulty is that the clearest track to a simpler code with lower rates would require eliminating or curtailing cherished tax breaks such as those for home mortgage interest, charitable contributions, domestic manufacturing and capital gains.

“A lot of these groups are pretty well-organized, so I think this battle within the business community of who’s going to win and who’s going to lose is the big issue,” said David Kautter, managing director of the Kogod Tax Center at American University in Washington. “That’s what makes it hard.”

Negotiators had been discussing an agreement that would set a short timeline for rewriting the tax code with parameters for revenue and an enforcement mechanism that would trigger consequences if Congress doesn’t act. Boehner said yesterday that he was ending discussions with the White House.

‘Incredibly Difficult’

The outlines of an agreement could have made it difficult for lawmakers to agree on the details of a tax rewrite, said Melissa Mueller, a former Democratic tax counsel for the Ways and Means and Senate Finance committees.

“They’ve sort of gotten whipped up in the frenzy of tax reform and how easy it might be in the abstract,” said Mueller, now a partner at the Washington lobbying firm Capitol Tax Partners. “But when you actually get in and see the specific ways of doing it, it’s incredibly difficult.”

The arithmetic required to trade tax breaks for lower rates, it’s much simpler than the politics, said Representative Kevin Brady, a Texas Republican on the Ways and Means Committee.

“On paper, yeah, it’s very easy to make the adjustments and changes,” he said in an interview yesterday. “In real life, to seriously dial down the tax rates, you have to seriously eliminate some very popular, very politically sensitive exemptions, credits and incentives.”

Higher Revenue

Additionally, if an agreement included higher revenue through a tax code overhaul as a condition of obtaining spending cuts, Republicans would have to write a bill that violates some of their core principles.

“The higher revenues make it harder to get the kind of tax reform that we need to grow our economy,” Ways and Means Chairman Dave Camp said yesterday in an interview on “Political Capital with Al Hunt” airing on Bloomberg Television this weekend. “And also, I really believe it will make it harder for us to create jobs.”

Camp said in an interview after the televised taping that such a revenue target wouldn’t necessarily make it impossible to overhaul the tax code, and he didn’t rule out advancing tax changes with a higher revenue target as part of a broader bipartisan deficit-reduction package.

In 1986, during the last major tax code overhaul, Congress stuck to a revenue-neutral framework, which created a zero-sum environment. In that law, Congress shifted tax benefits from businesses to individuals. A framework this year that raised revenue would tip the balance so that politically vocal losers would outweigh the winners, Kautter said.

“When you don’t have a reduction for most people,” he said, “then I think the dynamic changes dramatically.”

Advancing a Rewrite

The Ways and Means chairman said he is trying to write a corporate tax overhaul bill this year. Because many businesses are taxed through the individual tax code, Camp has long said he wants to address both parts of the tax system together.

Camp, a Michigan Republican, and Senate Finance Committee Chairman Max Baucus, a Montana Democrat, have been holding hearings this year on the tax code. Next week, Camp’s panel will consider consumption taxes and Baucus’s committee will hear about the tax code’s effect on job creation from chief executive officers of Wal-Mart Stores Inc., Kimberly-Clark Corp., PMC- Sierra Inc., and CVS Caremark Corp.

The hearings haven’t focused on a particular proposal. The Treasury Department may release a corporate tax overhaul framework after the debt ceiling debate is concluded, Treasury Secretary Timothy Geithner has said.

“There is nothing really specific, no proposal to point at to say, this works and this doesn’t,” Mueller said. “Once you really have a proposal, then you can really have a serious conversation. How long that takes? I don’t know.”

Ultimate Goals

While Camp and Baucus talk regularly and on July 13 held their committees’ first joint hearing on tax policy in more than 70 years, they don’t necessarily agree on the ultimate goals of tax policy. The gaps between them mirror the philosophical gaps between their parties.

Camp wants to lower the top individual and corporate tax rates to 25 percent and collect the same amount of revenue as if all of the expiring tax cuts were extended and the tax increases in last year’s health-care law were repealed.

Baucus, in contrast, wrote major portions of the health- care law and has supported Democratic efforts to extend tax cuts for individuals earning less than $200,000 a year and married couples earning less than $250,000 without also extending the cuts for high-income taxpayers.

Political Calendar

One additional complication is the political calendar. Any tax-code rewrite would have to occur in the months leading up to the 2012 election, while Obama is running for re-election and while the House and Senate minorities seek control of their respective chambers.

“It absolutely makes it more challenging,” said Arshi Siddiqui, a partner at Akin, Gump, Strauss, Hauer & Feld in Washington who was a tax adviser to Representative Nancy Pelosi when she was House speaker. “It will take a while to do kind of a reasoned approach to this.”

Even without a total rewrite of the tax code, Congress likely will pass significant tax legislation before it adjourns at the end of 2012. Extensions of the income and estate tax cuts expire at the end of 2012. Popular business tax breaks such as the research and development tax credit expire at the end of this year.

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