Tax reform may be the new puppy of politics: Everyone likes it in theory, but when it’s gnawing on your shoes, howling all night and having accidents on your carpet, things get a little dicey.
Conceptually, Democrats and Republicans agree that the current tax code is a cumbersome mess; weighing in at whopping 73,954 pages, it’s so difficult to navigate that 90 percent of Americans use either software or a hired professional to do their taxes.
Both sides also agree it’s also not fair, full of loopholes that allow some companies to pay virtually no taxes while others pay more than 40 percent.
And it’s powerful, capable of helping or hindering the economy, encouraging behavior such as buying houses, donating to charities, or locating new factories in the United States or abroad.
It’s those factors that have spurred lawmakers to sit down and take a close look at the tax code in the hopes for the first major reform since 1986. Some are hopeful — bullish, even — that that the new year will bring a new focus on simplifying and overhauling a tax code that they say has done little to help the economy recover.
House Budget Committee Chair Paul Ryan, R-Wis., who is vying to take over the helm of the powerful House Ways and Means Committee in 2015, expressed hope earlier this month that the committee would introduce something early next year. And Rep. Pat Tiberi, R-Genoa Township, a member of the committee, predicts the House will introduce tax reform legislation soon after Jan. 1.
Different reform goals
Republicans see lowering the corporate tax rate, expanding the base and eliminating loopholes as key to reducing the deficit and boosting the slowly-recovering economy.
Democrats agree that the corporate tax rate is too high. They also want to generate new revenue, primarily by taxing wealthier Americans. Doing so, they say, could do more to stimulate the economy, which would also decrease the deficit.
“What Democrats really want is greater fairness in the tax code. What Republicans really want, I think, is they want a more robust, more rapidly growing economy and greater prosperity, which they think will trickle down to everyone,” said Richard Vedder, an economics professor at Ohio University. “There ought to be places to make deals.”
There’s a lot on the line, said Pete Sepp of the National Taxpayers Union, a taxpayer watchdog. “The tax structure doesn’t just go to questions of who pays what,” he said. “It goes to question of how our economy will evolve in the future.”
The committees working on tax reform have already done a considerable amount of work. Tiberi said the House Ways and Means Committee has worked on the issue since 2011, including convening the committee, its subcommittees and more than a dozen working groups.
In early 2013, House Ways and Means Chair Dave Camp, R-Mich., and Senate Finance Chair Max Baucus, D-Montana, did a “road show” where they traveled the country together talking about the need for tax reform. The two are amicable, said Tiberi, but that may not matter in the end: President Obama earlier this month signaled his intent to nominate Baucus as the ambassador the China, which means that if he’s confirmed, there will be a new chairman of the Senate Finance Committee.
But Tiberi worries that politics will quickly eclipse any progress. He said despite years of work, the bill runs the risk of becoming the House Republican bill as soon as Camp introduces it, meaning it will be immediately politicized. It’ll take far more than the two congressional committees, he said, to get a bill passed.
“If we don’t get the administration engaged…it’s just not going to happen,” Tiberi said.
A congressional dilemma
But Sen. Rob Portman, R-Ohio, a member of the Senate Finance Committee, said Congress can’t afford not to move forward.
“It doesn’t make any sense for us to sit back, wring our hands and say, ‘it’s just too hard,’” he said. “We have to do it if we want to help American workers get better jobs with better pay and better benefits, because right now we have a situation where American companies are competing with one hand tied behind their back.”
He said that should Baucus be confirmed as ambassador, his likely replacement would be Sen. Ron Wyden, D-Ore. “He is also a strong advocate for tax reform, Portman said. “He assured me he’s going to push hard for tax reform.”
But Matt Yuskewich, a Columbus-based CPA with the Winterset Group, said he’s not optimistic. He said there’s been so much focus on the new health care law, which is administered by the Internal Revenue Service, that it’d be hard to shift to tax reform. “I don’t see it happening,” he said.
Too bad, he says, because the tax code is a mess. He can count at least five deductions aimed to help people pay for education and at least five for retirements. It’s confusing, and needs to be simplified, he said.
“If tax reform is done and simplification is one of the major themes, I think that helps everyone,” he said. “I just personally don’t hold out any great hope it’s going to happen.”
The agreements, like the concept, are broad. Both Democrats and Republicans agree that the corporate tax rate, at 35 percent, is too high; it’s the highest in the world. Both agree that eliminating loopholes and broadening the base would simplify the code.
Even that isn’t a clean fix, said Tiberi.
Can loopholes be eliminated?
He said that many businesses don’t pay the corporate tax rate, but instead operate as “pass-throughs” paying taxes on business income at the marginal level. The new health care law has put their tax rate at more than 40 percent, he said, which makes the debate a little less tidy.
And beyond that, there enough deductions and credits that some companies end up paying far less while others pay far more.
“You can’t have a small business paying almost 45 percent and a Fortune 500 company that’s competing around the world paying 25 percent,” he said. “Politically, that doesn’t work.”
The other area of consensus might be on eliminating loopholes, Vedder said.
“The tax code has become riddled with all sorts of special provisions over time and there’s virtue in simplicity,” he said. ‘Simplicity means getting rid of a lot of those things and having fewer exemptions.”
The rub there: Which loopholes do you eliminate? And which do you keep?
It’s hard to eliminate loopholes, said Sen. Sherrod Brown, D-Ohio, who is also a member of the Senate Finance Committee and who argues special interests will fight hard to keep their exemptions. “Because they were there for a reason.”
But Roberton Williams of the Tax Policy Center, a nonpartisan think tank devoted to tax policy, said a larger hangup may ultimately kill the prospects for tax reform: Disagreement over how much revenue the federal government should bring in.
While both sides appear to agree that corporate tax reform should be revenue-neutral, meaning any changes to the corporate tax code should be paid for by other changes, Republicans and Democrats disagree over whether to make changes to the individual tax code revenue-neutral as well. Republicans would like it to be; Democrats are more inclined to use reforms as revenue to help pay for federal programs.
“The issue comes down to how do you balance your budget in the first place,” Williams said. “Republicans say it all has to be on the spending side. Democrats say it can’t all be spending.”
Williams believes corporate tax reform could happen. He’s less bullish on individual tax reform.
Part of that comes down to public outcry. Because 90 percent of the public relies on a computer or professional to do their taxes, it’s become “a black box to us,” he said.
“If we had to do our own tax returns by hand, a lot more people would be saying ‘this is a mess,’” he said. “And we need to fix it.”
Two-part series on government spending
Today, the Dayton Daily News examines the upcoming congressional debate on the tax code and the potential first major reform since 1986. On Monday, we will preview how Democrats and Republicans each have their answers to the budget crisis. Democrats want more revenue. Republicans want entitlement cuts. We review the pros and cons of each alternative.
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