Tax reform: Why it's needed, why it's hard for Washington to get it done.
President Obama and the incoming Republican Congress generally agree that tax reform should be a priority for 2015. However, successful reform looks very different from each side of the aisle.
Reforming the US tax code is one of the ripest areas for big legislation in the new year. This is an issue where both sides agree on the need for action, even though a Democrat is in the White House and Republicans have a lock on Capitol Hill.
And although the two major parties don't see eye to eye on the precise details of reform, it's an issue where the business community – a major lobbying influence on both sides of congressional aisles – is eager to fix tax laws that are seen as a global disadvantage for US companies.
Consider this, too: John Koskinen, commissioner of the Internal Revenue Service, has offered little hope that the IRS help lines will be able to help Americans wade through the increasingly complicated forms and rules.
“All we can try to do is maximize the resources available [to answer questions] in that January to May timeframe to make sure that during the filing season we do as well as we can,” Commissioner Koskinen said at a November accounting conference. “And ‘as well as we can’ is still going to be miserable.”
But if tax reform is needed, it's also notoriously hard to do.
When Congress gets down to negotiating details, obstacles can pop up quicker than you can say Dave Camp. He’s the outgoing Republican chairman of the House Ways and Means Committee, who pulled together an ambitious tax reform plan last year and watched it go nowhere, even as he decided not to seek reelection.
Mr. Camp offered what many tax experts saw as a serious plan to streamline the tax code, simplifying it while seeking to ensure that it would raise the same amount of revenue. The plan also sought to keep the tax burden on different income groups unchanged.
But Camp’s ideas were met with the cold shoulders of indifference and outright opposition. Some of the reasons:
- “Revenue-neutral” proposals aren’t automatically palatable. Many Republicans want to keep cutting taxes, while many Democrats insist that revenue boosts will be essential as the retirement of baby boomers puts added strain on Medicare and Social Security. Splitting the difference isn’t an easy way out of the debate.
- The inequality debate remains. President Obama has won some tax hikes on the rich. But as with overall revenue, the two sides are ideologically opposed over what makes for tax code fairness. Conservatives emphasize fewer and “flatter” tax-rate brackets, as an incentive for people to work and invest. Liberals worry about a tax code that will keep allowing gap between the rich and the rest of America to widen.
- Simplification means making unpopular choices. In theory, no one argues with the idea that the tax code is too complex. At least on the corporate side of the tax code, both sides agree with the goal of lowering official tax rates while “broadening the base” of income that’s taxed (by eliminating many deductions). But simplifying means choosing which tax breaks should go. Each provision in the law has its fans and its well-paid lobbyist defenders.
All these challenges haven’t gone away.
Add in the delicate triangulation needed to piece together a massive law that appeals to the House, Senate, and the president, and it’s clear why major tax overhauls are rare.
But again, some pressure is on to make tax reform happen.
It’s a high priority for business groups like the US Chamber of Commerce, who say the United States is falling behind other nations in attracting foreign investment.
And don’t underestimate the desire of leaders like President Obama, incoming Senate majority leader Mitch McConnell, and incoming House Ways and Means Chairman Paul Ryan to chalk up some meaningful legislative achievements in 2015.
If they succeed, a key question will be whether the changes focus on the business side of the code or also try to make tax filing less stressful for individuals.
Improving the tax code is politically hard. But don’t rule out the possibility. Not doing reform is also hard.