Overhaul of US Tax Code Is Unlikely Before 2012 Election

Wednesday, 05 Jan 2011 03:57 PM

 

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President Barack Obama wants to revamp it. Some Republicans want to rip it up. But the U.S. Tax Code, more than a million words long, will likely have to wait until after the 2012 presidential election.

Major surgery of the tax code is one of the ideas to trim the $1.3 trillion budget deficit that both Republicans and Democrats agree is needed.

Hearings and piecemeal legislative efforts are likely over the next year. Yet the new Congress, which begins on Wednesday, is unlikely to enact broad tax reform—defined by most as cutting tax rates by closing special breaks for individuals and corporations—until the president takes the lead.

"The overriding requisite for tax reform over any time horizon is for the administration to really make it their No. 1 issue, much as they did with healthcare," said Ray Beeman, an attorney who worked on the 1986 tax code reform under President Ronald Reagan. "That means doing something more than a press conference, and reinforcing the message on a daily basis."

With Obama's re-election campaign ramping up and the top Senate Republican saying his biggest goal is to get the president out of office, many believe any overhaul will have to happen after the election.

"If President Obama is re-elected in 2012, his administration, knowing they have nothing to lose, can do the right thing and push for this," said Neal Weber, a director at McGladrey, which advises corporate clients on tax issues.

Obama clinched a deal with Republicans in the waning days of the last Congress to extend much of the tax code—from low individual rates to corporate tax breaks—for two years, at a ten year price tag of $858 billion.

That deal will make it harder to enact major changes before those laws expire.

Reagan's historic rewrite of the tax code in 1986—accomplished with a Democratic House 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 breaks have since been revived, leading to a code many liken to Swiss cheese.

"Once you get into the nitty gritty of tax reform, you have to look at who the winners and losers are," said Caroline Harris, a tax policy expert at the U.S. Chamber of Commerce.

In the new Congress, a first test will come in 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.

"It's the beginning of a new Congress, and everyone is in a good mood," said William Gale, an economist at the Brookings Institution. "It will depend on the parties' sense that they will benefit more from reaching an agreement, or not."

A presidential commission tasked with drawing up a plan to cut the U.S. deficit came up with bold ideas to reform the tax code such as limiting or cutting popular deductions. In a sign that Democrats and Republicans can put aside their differences, two current elected officials from each party voted in favor of its recommendations.

Republicans took control over the House in the Nov. 2 elections, leading to a divided Congress. That is good for reform, giving each an incentive to compromise.

Even with Americans telling pollsters they fret about the deficit, the choices they have to make to streamline the tax code will not be popular.

For example, the president's deficit panel suggested cutting what are known as tax expenditures—including popular deductions for home mortgages and healthcare expenses.

An area of potential compromise is the corporate tax rate, now at 35 percent, nearly the highest in the developed world.

Obama has been on a fence-mending mission to court corporate America after bruising battles over healthcare and financial reform in his first term.

Last month, he asked chief executives for ideas on ways to cut the top 35 percent corporate rate.

Alex Brill, a former congressional tax staffer now at the American Enterprise Institute, notes that tackling corporate tax would be less demonized in an election.

The dilemma, of course, is that cutting the corporate rate will entail coming up with a way to pay for it. That means closing loopholes—which in effects raises taxes on some.

"There isn't low-hanging fruit, so you'd have to go after everyone collectively," Brill said. "If it is a high enough priority for the president and there is a carrot—the lower rate—companies would be willing to play ball."

© 2014 Thomson/Reuters. All rights reserved.

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