February 27, 2012
Tangled Tax Code Primed for Pruning
President Barack Obama's business-tax-overhaul plan underscores the growing likelihood of a serious effort to revamp the nation's much-criticized tax system, no matter who wins the White House.
The question now isn't whether a tax rewrite will happen, but how far it will go, and whether it will stop at business rules or also extend to individuals. Increasingly the answer appears to be that the entire tax code, all 70,000 pages, could be in play.
Asked about the odds of a comprehensive overhaul next year, Rep. Pat Tiberi (R., Ohio), the chairman of a key House Ways and Means subcommittee, replied: "I'd say over 50%."
Like other House Republicans, Mr. Tiberi welcomed Mr. Obama's plan for its acknowledgment of a problem with business taxes. The top U.S. rate of 35% is among the world's highest, although deductions allow some companies to lower their taxable income. Total corporate federal taxes paid was 12.1% of profits earned from activities within the U.S. in fiscal 2011, the lowest since at least 1972.
Mr. Obama would slash the top U.S. corporate rates to 28%, while narrowing numerous breaks. House Republicans have called for cutting the top corporate rate to 25%.
There is reason to think Congress will tackle the entire tax code, including individual rules, Mr. Tiberi said. That could help alleviate concerns about its economic distortions, complexity and perceived unpredictability and unfairness. "The madness has got to stop," Mr. Tiberi added.
Of course, the current system has proved remarkably resistant to change. There are reasons why the parties might fail again to change it, particularly given the political volleying over taxes being paid—or not paid—by wealthy individuals and big companies.
Rhetoric aside, the biggest difference between the parties remains over how far to go. Many Democrats lean toward a rewrite of business taxes alone, one that would lower the corporate rate and equalize disparate tax burdens faced by industries and companies.
But many Democrats also are acknowledging the need for sweeping overhaul. "We'd be wise to give it a go from all angles and then see where we end up," said Rep. Richard Neal of Massachusetts, a senior Ways and Means Democrat.
Republicans want to revamp the individual tax system. too. They worry a corporate-only overhaul could disadvantage successful firms that are organized as small businesses and pay taxes through their owners' individual returns. Small-business owners already face higher individual tax rates in coming years, particularly if Bush-era cuts for higher earners expire, as Mr. Obama advocates.
Republicans also point to the economic lift they believe could come from a root-and-branch overhaul of the tangled U.S. tax code, including a flatter rate structure. Many Democrats, however, like the current system's highly progressive structure and relatively generous benefits for lower-income households.
Of course, if a Republican wins the White House in November, the GOP goal becomes easier; all the Republican candidates say they support a full-scale revamp. But even if Mr. Obama is re-elected, a serious effort at rewriting the whole system seems increasingly likely, probably in 2013.
Ways and Means Chairman Dave Camp (R., Mich.) and Senate Finance Committee Chairman Max Baucus (D., Mont.) have been working unusually closely on the issue. Sen. Orrin Hatch (R., Utah), who could become Finance Committee chairman if Republicans take the Senate this year, said in a statement he would make a tax overhaul "my central priority."
Powerful dynamics are reducing the significance of partisan differences. One is the expiration of Bush tax breaks at the end of 2012. A broad tax overhaul could give each party a way to break the cycle of short-term tax extensions that is frustrating businesses and individuals. Another is the government's grim fiscal situation. Many Democrats and even some Republicans see a streamlined tax system as a way to generate more revenue.
Beyond that is the balky economy, which has shown signs of strength but remains hampered by unemployment and uncertainty, including on taxes. Given all those factors, "you couldn't design a better opportunity to launch tax reform," said a Senate Democratic aide.
Already, there is evidence of a possible political convergence on solutions, particularly on how to tax multinationals' overseas operations. "Now that we have more detailed proposals from the administration, we see a consensus emerging" on an overhaul on international-tax issues, said Michael Mundaca of Ernst & Young, who was a Treasury tax official in the Bush and Obama administrations.