Every few years, as regularly as clockwork, Washington starts talking about “simplifying” the Tax Code.
Then, just as regularly, the Tax Code only grows longer and more complicated. Could 2011 finally be the year when the Tax Code actually does get to be a bit more straightforward? Don’t count on it, but what you can be sure of is a lot more talk about it.
The latest effort to “simplify” the Tax Code actually started last year when the deficit commission, officially known as the National Commission on Fiscal Responsibility and Reform, got to work on ways to reduce the federal budget deficit and the national debt. In the end, the commission produced a
However, not enough of them voted to approve the final report and send it to Congress. Also, many members of the commission had balked at an earlier set of proposals in a
While not enough members of the commission voted in favor of the final report, President Obama still greeted the document as a serious effort and pledged to take up the matter of deficit reduction and Tax Code reform this year. However, with Congress now divided between Republican control in the House and Democratic control in the Senate, the prospects for tax reform this year appear murky.
Still, this may be one area of common ground. Republican lawmakers certainly appear to be eager to re-jigger the Tax Code. In the lame-duck session, Obama managed to work out a deal with Senate Minority Leader Mitch McConnell, R-Ken., to extend the Bush-era tax rates for another two years, along with setting the estate tax at 35 percent and cutting payroll taxes by 2 percentage points for a year. While the deal may not have simplified the Tax Code at all, it at least showed that compromise was possible between the Obama administration and Republican lawmakers.
As Republicans prepare to take control of the House this week, Majority Leader Eric Cantor, R-Va., has talked of his willingness to work with the White House on reforming the Tax Code. Obama is also expected to at least give lip service to reforming the Tax Code in his State of the Union address this month.
If any progress is made on this front, some of the groundwork for this bipartisan cooperation was laid last year not only by the work of the deficit commission, but also during hearings by the Senate Finance Committee. Chairman Max Baucus, D-Mont., and ranking member Charles Grassley, R-Iowa, held a series of hearings examining the historical evolution of the Tax Code. They paid particular attention to times when lawmakers actually managed to reform the Tax Code, such as 1986, when President Reagan managed to forge a deal with a similarly divided Congress.
One incentive for compromise may be the push for driving down the corporate income tax rate of 35 percent, which business lobbyists have been pointing out for years makes the U.S. uncompetitive with many other economies. What they avoid pointing out, of course, is that the effective tax rate for many multinational companies is far lower than 35 percent, as many companies take advantage of various tax deferral and transfer pricing strategies by shifting income to low-tax countries.
Still, as our northerly neighbor Canada slashes its corporate tax rate from 18 percent last year to 16.5 percent as of January 1, and 15 percent next year, the U.S. may be pressured to follow suit. That could re-open the Tax Code, at least on the business side, to renegotiation on other fronts in order to lower the statutory corporate income tax rate while paring back some of the other tax breaks enjoyed by companies.
However, after the December deal to extend the Bush tax cuts for another two years, the prospects for immediate tax reform this year appear dim. That may have to wait until 2012, which will once again be an election year. And if it goes anything like last month’s deal, the tax reform may come in the form of a rushed compromise meant to avert a sudden and brutal tax hike.
When that happens, don’t expect the final result to be anything like a streamlined Tax Code. Instead, we’re likely to get patches on top of patches as lobbyists rush to defend their industry’s favorite tax breaks and loopholes. Simplifying the Tax Code may be good in theory, but it’s not so good when it comes to actually paying taxes.
