Facing the prospect of a large tax increase with the expiration of the Bush tax cuts in the midst of a fragile economic recovery at the end of 2010, President Obama agreed to continue the cuts on all income levels for two years.
In exchange for extending the tax cuts on household income above $250,000, Obama got Republicans to agree to his own preferred tax cut: a one-year reduction in employee payroll taxes that has since been prolonged through 2012.
There is widespread agreement that the tax code should be made more predictable and economically efficient, and that the best time to attempt a structural overhaul would probably be the first year of presumed GOP presidential nominee Mitt Romney’s presidency or in an Obama second term.
Doubts Steeped in Deep Divisions
Still, many tax experts doubt that a 1986-style tax overhaul can happen next year no matter what happens in the elections. Partisan divisions in Congress are too deep, they say, and the current structure of the tax system makes it much more difficult to craft the sort of legislation that was assembled a quarter century ago.
Congress was able to pay for lower rates then by raising taxes on corporations and closing glaring tax loopholes, but the same opportunities are not there this time around, said David Gamage, an assistant professor of law at the University of California and former tax counsel in the Treasury Department.
“Today, Republicans want to lower tax rates on capital, lower tax rates on corporate transactions, and there isn’t the money to be raised for shutting down abusive transactions like there was pre-1986,” Gamage said.
Today, broadening the tax base would likely mean scaling back large tax breaks such as the home mortgage interest deduction and the federal deduction for taxes paid to state and local governments, experts say. Drastic rate reductions of the sort proposed by House Republicans and Romney could require lawmakers to dip into the pool of tax breaks for low- and middle-income earners, such as the child tax credit and earned income tax credit. And lowering the top income tax rates without making the tax code less progressive would require raising tax rates on capital gains and dividends.
Despite the obstacles, many aides on the congressional tax-writing committees remain convinced that major tax legislation is possible. They note that Ways and Means Chairman Dave Camp, R-Mich., and Senate Finance Chairman Max Baucus, D-Mont., have a close working relationship. Camp was recently diagnosed with non-Hodgkin’s lymphoma, but he is expected to continue his work in Congress while undergoing treatment and make a full recovery.
In recent months, tax committee staffers have organized hearings on controversial subjects such as the taxation of capital gains. They have also engaged in the tax equivalent of war games, figuring out how different proposals might fit together and affect revenue collections on the chance that lawmakers decide to use them.
“The simple fact is that behind the scenes on both sides of the Capitol and on both ends of the political spectrum, serious work is being done on tax reform. The question is not if it happens, but how soon. The economy demands it,” a senior GOP aide said.