The House on Wednesday approved a one-year extension of all the Bush tax cuts, a bridge intended to give Congress time to do what both parties say is needed in 2013: wide-ranging tax reform.
To get to tax reform, Congress will have to overcome its fractious history on tax matters. The House vote follows the Senate vote to extend the Bush-era tax cuts only for households with income up to $250,000. Nineteen Democrats broke ranks to vote with Republicans on the mainly party-line House vote. Party leaders of both chambers have no interest in heading to a conference committee to hash out the differences in the fortnight of working days left before the November election.
And back in 2011, legislators put off that heavy lift until the greener pastures of 2012 in hopes of a less partisan atmosphere with more time for negotiation. Needless to say, those hopes have been dashed: Not only are no negotiations on tax reform under way in the House, there aren't even informal talks, Rep. Sander Levin of Michigan, the top Democrat on the tax-writing Ways and Means Committee, told CSPAN's "Newsmakers" last week.
Despite a lost year of no bipartisan negotiation on reworking the US tax code, the House GOP will take its first step toward a new attempt at tax reform Thursday. Just before heading out for Congress’s August break, the House will almost certainly pass a proposal from Ways and Means Chairman Dave Camp (R) of Michigan that lays out the GOP’s principles for revising the tax code.
Central to the plan are lower marginal tax rates and fewer tax brackets, as well as the elimination of some tax loopholes and tax deductions in a bid to broaden the tax base.
But getting to tax reform – a goal broadly sought by both parties – remains a difficult trade-off between competing aims of economic growth, social goals, and fairness.
“My example for why [tax reform is] hard is next year will be the 100th anniversary of the income tax and we have had less than a handful of comprehensive tax reform” proposals become law during that time, said Douglas Holtz-Eakin, chief economic policy adviser to Sen. John McCain during his 2008 presidential campaign and a former Congressional Budget Office director. “As a going-in proposition, tax reform is very, very difficult.”
Representative Camp’s legislation lays down the Republican approach to tax reform in the House – and demonstrates the tension between reducing taxes to the level lawmakers seek and having to gore many politically sensitive oxen along the way.
Camp’s proposal holds that tax reform should reduce rates by lowering the number of tax carve-outs for individuals and corporations. Individual income-tax rates would be condensed from six tax brackets to two, at 25 percent and 15 percent, while corporate taxes would fall to no more than 25 percent.
The reform would eliminate the Alternative Minimum Tax (AMT), an ill-conceived tax item that Congress patches every year to avoid snaring millions of middle-class Americans with a levy that aimed to prevent the richest Americans from paying too little in taxes. It would, finally, change the United States to a territorial taxation system, a policy taxing corporate profits earned in the US but not overseas.
Where things get tricky is wedding those hard figures to the bill’s qualitative goals.
Camp’s bill calls for a tax code that is simple, meaning fewer costs to taxpayers for compliance. The resulting code should reduce the burden on married couples and families, and make it easier for Americans to save. And it should maintain its progressive character so as not to “overburden any one group.”
This intuitively makes sense to many in Congress – lower taxes are good and the goals sound laudable.
“We conclude that paying for lower rates would require substantial reductions in broadly used and popular preferences,” according to the report. “In addition, requiring that changes maintain the current progressivity of the federal income tax would make it much harder to find a politically acceptable mix of preferences to curtail.”
As an illustration, the Tax Policy Center projects that under a less ambitious plan that Camp’s – reducing all current rates by 20 percent, leaving a top income-tax bracket of 28 percent – the tax code would need to raise some $320 billion more than current tax policy in 2015. There will be some $1.1 trillion in estimated tax expenditures that year – that is, tax breaks – meaning about 30 percent of them would need to be wiped out.
Would Congress be willing to dip into some $327 billion representing lower tax rates for investment income (sacrosanct to Republicans) and pretax treatment for contribution to retirement accounts, among other similar provisions? That would hurt the goal of helping families to save.
What about $122 billion in tax breaks that go to mostly low-income families, such as the child tax credit, the low-income tax credit, and partial exclusion of Social Security income? Cuts there don’t keep taxes on their same progressive plane.
There are “other” tax preferences amounting to $182 billion. These include excluding tax consideration of combat pay to soldiers, excluding capital gains on death, and cash benefits for low-income families. These other tax preferences have been targeted by several deficit-reducing commissions.
That leaves a passel of middle-class favorites like tax breaks for health insurance, mortgage interest, charitable contributions, and exclusions for state and local taxes – amounting to the largest chunk of tax breaks, at $462 billion a year. What portion of those would tax reformers be willing to reduce or eliminate?
In the case of GOP presidential nominee Mitt Romney’s tax plan, in fact, achieving tax fairness may be impossible, according to an analysis conducted by the Tax Policy Center The Center's analysis of Governor Romney's very general tax plan estimates that achieving his tax goals would transfer $86 billion in tax burden from Americans making over $200,000 per year to those making under that same amount.
Democrats, even those who favor revamping America’s spending and taxing priorities through a wide-ranging plan like the Simpson-Bowles debt-reduction proposal, scoff at Camp’s plan.
“The premises are unrealistic and will not accomplish the objectives [of] either reforming taxes or reducing our deficit,” said House Democratic whip Steny Hoyer (D) of Maryland on Wednesday, a proponent of a “big, bold” framework for cutting the nation’s debt, including reducing spending, raising taxes, and reforming entitlement programs like Medicare and Social Security.
In addition, Democrats chide Camp for a lack of specificity.
“He’s never indicated how you would get there” on lower tax rates, said Congressman Levin on C-SPAN last week. “There haven’t been useful discussion because, essentially, they say 25 percent and there isn’t a clue as to how they get there.”
The same problem bedevils Democrats such as Hoyer and Levin, who embrace the concept of tax reform: Where are you going to cut?
“Simply finding a segment of society that you can raise taxes on in order to fill a stop-gap measure is just not enough,” Camp told reporters Wednesday. “We need comprehensive reform.”