Tax Reform Prospects Dim in Wake of Election

The chances for comprehensive tax reform occurring in the wake of Tuesday’s elections are murky at best, with a divided Congress and a re-elected President who has been unable to persuade Republicans to support his tax policies.

Andy Mattson, a partner with Mohler, Nixon & Williams, a firm in Silicon Valley that is part of the Moore Stephens North America association, provided his perspective on the election while attending the AICPA National Federal Tax Conference in Washington, D.C. He cautioned that his personal views do not represent those of the AICPA.

“There is very little chance of comprehensive tax reform,” he said via email. “It was pointed out yesterday that the Tax Code has been around for about 100 years and there have only been three or four instances of major tax reform (depending upon what you count as tax reform).”

The government has no money to pay for anything major, Mattson pointed out. “The current and projected deficits are at post WWII highs, which arguably makes this one of the worst times for comprehensive reform,” he said. “In addition, not only is the government divided, it is hyperpolarized.

In order to make the Tax Reform Act of 1986 possible, Democrats and Republicans in the House and Senate worked together, he observed. “Today, many moderates and centrists who were used to ‘working across the aisle’ have been voted out of office,” said Mattson. “This year, Congress has been unable to even pass the extenders, such as the ‘AMT patch’ and the R&D credit, both of which expired on Dec. 31, 2011. And in the past two years, Congress and the Administration have struggled to even raise the debt ceiling, which in the past has been a routine matter.”

“As to the rate expirations, the economy remains very weak,” Mattson pointed out. “Because of this and for the above reasons, Congress and the Administration are likely to ‘kick the can down the road.’ One theory is that the rates will be extended for a very short period of time, for perhaps three months, so that something can be done after the new Congress convenes. Another school of thought is that there will be a one year extension for all taxpayers, with the Administration only agreeing to extend the rates for high income taxpayers in exchange for a concession from Congress to also extend the 2 percent payroll tax holiday. And there is of course the chance that there will be no agreement whatsoever, autopilot takes over, and the rates go up on New Year’s Day.”

Mattson believes it is likely that the fix will again be short-term. “If I had to bet, I would put my money on a one-year extension,” he wrote. “The only factor that could alter the calculus is the President’s relatively strong showing yesterday. This could give him some short-term leverage to get a rate extension for only those with income below a set level. This will presumably become clearer in the coming days but that is my personal take as of now.”

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