Pathway to tax reform
Congress considers plan for pursuing comprehensive tax reform in 2013.
August 9, 2012
To date, the tax committees of the 112th Congress have held more than 30 hearings on various aspects of tax reform. Topics included taxation of business entities; incentives for innovation; tax treatment of debt and equity; and incentives for education, charitable giving, and home ownership.
The hearings raised many questions and produced some answers. What the discussion did not produce, though, was a plan for making tax reform happen. House Rules Committee Chairman David Dreier, R-Calif., addressed this missing piece on July 24 via H.R. 6169, the Pathway to Job Creation Through a Simpler, Fairer Tax Code Act of 2012. The bill moved quickly, passing in the House on Aug. 2 (232–189). H.R. 6169 provides reasons for comprehensive tax reform, lays out broad elements of a reformed tax system, and includes a plan of action. This article summarizes H.R. 6169, describes the concerns of opposing members, and notes some obstacles.
Problems warranting reform
H.R. 6169 lists 19 problems with the Internal Revenue Code. They are arranged below according to key themes. The number in parentheses refers to how the item is numbered in H.R. 6169.
Elements of comprehensive tax reform
H.R. 6169 calls for “enactment of comprehensive tax reform” in 2013. Elements of a reformed system include the following:
Plan for action
H.R. 6169 calls for the chair of the House Ways and Means Committee to introduce a tax reform bill by April 30, 2013. An expedited review procedure is spelled out with respect to deadlines for committee consideration and minutes of debate.
H.R. Rep’t 112-629 by the House Committee on Rules includes the dissenters’ concerns. This group agrees with the need for comprehensive tax reform, but objects to the plan and some of the principles. For example, they prefer a “rate structure that distributes the tax burden in a more progressive manner.” They also want to be sure time is given to proper vetting of proposals. The report closes with the following statement that indicates that the political parties have differing views on the tax system problems and possible solutions: “Because the hard-nosed partisanship of H.R. 6169 cannot possibly form the foundation for a successful bipartisan tax reform effort, we must dissent.”
Many of the terms and suggestions in H.R. 6169 are vague. For example, it does not specify which “tax subsidies” or “loopholes” should be eliminated as part of base broadening. Calls for promoting innovation and keeping taxes on small businesses low may lead to continuation of some “tax subsidies” or spending, or perhaps creation of new ones, causing tension with the goal of base broadening.
Several of the suggestions will lead to political debate with a need for compromise to obtain the bipartisan support most likely needed for comprehensive tax reform. For example, given that President Barack Obama and many members of Congress want to let the 2001 and 2003 tax cuts expire for upper-income individuals, it will be difficult to “maintain modern levels of progressivity.”
Today’s low rates exist in a system that produces large deficits. Achieving even lower rates while lowering the deficit will require significant increases to the tax base (“base broadening”). This will likely require changes to the largest tax expenditures, such as the exclusion for employer-provided health insurance and the mortgage-interest deduction, which will be challenging. (See Joint Committee on Taxation, Background Information on Tax Expenditure Analysis and Historical Survey of Tax Expenditure Estimates (JCX-15-11), p. 25 (3/9/11).)
There is broad consensus that our current tax system suffers from many flaws and comprehensive reform is needed. However, many views exist on what the flaws are (such as whether a 15% rate on capital gains is too high or too low) and what a reformed system would look like (e.g., two rates or more). Because of this lack of agreement, H.R. 6169 may go nowhere (as of this writing, it was reported that the Senate may not even consider the bill).
The results of the November election are unlikely to change the status quo for achieving tax reform. Instead, the results may change which party gets to pass a plan. The major task of comprehensive tax reform and its economic and societal impacts is something unlikely to occur and be successful without comprehensive, bipartisan support.
For a complete list of the hearings with hyperlinks, see the author’s website for “Tax Reform Hearings of the 112th Congress.”
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Annette Nellen, Esq., CPA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She chairs the AICPA's Individual Taxation Technical Resource Panel. She has several reports on tax policy and reform and a blog.