Obama's State of Union to Be Probed for Tax Reform Tips

Monday, 24 Jan 2011 01:44 PM

 

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President Barack Obama has proposed revamping the dizzying U.S. tax code and many observers are eyeing his State of the Union address Tuesday for signs of his commitment.

Presidential leadership is essential for such a politically and economically complex task, last successful after Republican President Ronald Reagan struck a deal with congressional Democrats for a major code rewrite in 1986.

Reagan used a State of the Union address to publicly direct advisers to make recommendations for a tax code rewrite and made it a top priority.

With Obama half way through his first term and a new election campaign looming, many see the next two years as a ground-laying phase, leaving legislation for a second term.

Here are some key questions and elements of the debate.

WHY ARE PEOPLE TALKING ABOUT TAX REFORM NOW?

The fledgling economic recovery and concerns about annual deficits topping $1 trillion have pushed a tax overhaul up the economic agenda. Many budget experts note that both individual and corporate taxpayers are spending more money each year to prepare taxes -- while the government is getting less efficient at collecting it all.

Among the loudest voices of complaint are from big corporations, who blast the top marginal 35 percent rate, the highest in the industrialized world. Many economists and Obama officials agree with their argument that the high rate makes the U.S. less attractive relative to its peers.

WHAT IS LIKELY IN THE NEAR TERM?

Beyond the State of the Union, look to the president's budget for his stance on key tax issues. For the past several years, Obama has proposed canceling billions in deductions and credits used by corporations -- slamming them as "loopholes."

The president toned down those proposals in his second budget, so it will be worth watching what direction his tax ideas take when a budget proposal is released in February.

Also worth watching is a bid by Democratic Senator Mark Warner and Republican Senator Saxby Chambliss to translate advice from a presidential panel on cutting the deficit into legislation. This will include spending and tax elements.

More generally in Congress, there will be a series of hearings, where lawmakers will lay out their positions.

HOW HAS SUCH REFORM BEEN DONE IN THE PAST?

Reagan's rewrite of the tax code in 1986 — accomplished with a Democratic House of Representatives and a Republican Senate — is a model for how an overhaul can happen.

That landmark law slashed the top individual rate from 50 to 28 percent, and the top corporate rate from 46 to 34 percent. It ended preferred treatment for capital gains and trimmed a slew of cherished breaks including for mortgages.

Many of those tax breaks have since been revived, leading to a code many liken to Swiss cheese.

Although the debate is beginning with the corporate rate, many say an overhaul will have to tackle both individual and business taxes at once.

WHAT ARE THE BIGGEST STUMBLING BLOCKS?

Tax reform to many means making the tax code simpler, and lowering rates by cutting tax breaks for certain individuals and companies. The government subsidizes these breaks to the tune of $1.1 trillion a year, according to the congressional joint committee on taxation.

Most of these provisions have constituents — big and powerful ones — ready to oppose them.

On the individual tax side, for example, talk of trimming the home mortgage interest deduction will bring howls from the real estate industry and likely many in the middle class.

On the corporate side, Obama officials and other Democrats want to close some of the deductions and credits enjoyed by companies that critics call loopholes.

These include a break on taxing profits taxed abroad and tightening the use of tax credits companies can use to avoid double taxation.

Corporate America will fight hard for its piece of these tax provisions.

© 2014 Thomson/Reuters. All rights reserved.

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