Big spending cuts vs. tax reform: Can Congress do both?

The US tax code, it appears, has no friends.

At a congressional hearing Thursday, members of both parties joined in calling the current system burdensome, unfair, and a hindrance to job creation. So did five expert witnesses.

The hearing underscored the reasons the tax code is suddenly a focus of bipartisan discussion – an issue that both Democrats and Republicans see as a priority for the economy. A fundamental overhaul of the tax code for the first time since 1986 no longer seems out of the realm of possibility.

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But a big hurdle also emerged Thursday, as the two parties staked out different ground on solutions.

Where Democrats at the hearing called for a "deficit neutral" approach to tax reform (in which Congress commits that tax changes won't add to federal deficits), Republicans shied away from that commitment. The GOP instead emphasizes the potential economic benefits of tax cuts and worries that Democrats' approach signals a bid for tax-revenue hikes rather than spending cuts.

Some want to wield a big ax

In a separate move Thursday, a large bloc within the House Republican caucus – including many members affiliated with the tea party movement – signaled their alternative brand of fiscal discipline. They called for massive cuts in federal spending.

The so-called Republican Study Committee, which represents two-thirds of House Republicans, hopes to slash $2.5 trillion from spending over the next decade, with cuts occurring in discretionary areas of the budget rather than on mandatory programs like Medicare and Social Security. That's more a more ambitious goal than congressional Republican leaders have embraced so far.

The gambit isn't directly a tax-reform proposal, but it reveals the fiscal-policy gap between the parties, which was also visible in the recent deliberations of a bipartisan fiscal commission created by President Obama.

On the tax code itself, Republicans want a flatter tax code with fewer tax brackets, or even just one. Democrats want a more progressive tax code in which higher earners pay at a higher rates.

Potentially, the two sides could agree on a middle-ground plan that makes the tax code simpler, with lower tax rates for individuals and corporations but fewer deductions and credits.

In her prepared testimony at the hearing, Nina Olson, the official US taxpayer advocate, suggested that the odds of a deal on tax reform would be improved if the overhaul is crafted on a revenue-neutral basis for the government. In other words, the tax code would be simplified with no affect on the amount of tax revenue that comes in.

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