Tax Analysts Blog

Farewell to Feel-Good Tax Reform

Posted on Dec 9, 2013

“The Ways and Means Committee will write, act on and pass comprehensive tax reform legislation in 2013 . . .

Let me repeat that: We intend to move a comprehensive tax reform bill in 2013 — no matter what.”
- Chair Dave Camp, Nov. 15, 2012

"We're running out of time, and I have no plan to introduce the tax bill this year."
- Chair Dave Camp, Dec. 4, 2013

Now they know. Even the most hopeful politician. Even the most naïve journalist. Even the most determined corporate executive. Now they know what we who dwell in the tax jungle have known for a long time: Tax reform ain’t gonna happen. (We've been saying so for a while -- in 2012, in 2011, in 2010.) And we are not just talking about this year. It ain’t gonna happen in 2014 or 2015 or 2016. And -- unless something earth-shattering happens like Congress losing its fear of value added taxes -- it ain’t even gonna happen in 2017, even if Republicans win the White House and gain control of the Senate.

If such overriding pessimism is justified, why did anybody ever think tax reform was possible? It was a combination of factors. The rest of the developed world had significantly lowered its corporate tax rates. Having nothing to lose, President Obama said he would go along with a lower rate if corporate America could find the offsetting revenue increases. U.S. multinationals were fond of a lower corporate rate, but what they really wanted was the opportunity to bring home $1-trillion-plus of profit they had parked offshore.

Then, the deficit hawks like Bowles and Simpson, scared to death of offending Republicans sensibilities about tax hikes, tried to hide their modest revenue proposals inside a massive overhaul of the tax system. And then Republicans, both in Congress and on the campaign trail, seeing that huge deficits precluded Reagan-style tax cutting, made a big deal out of tax reform. Finally, Ways and Means Committee Chair Dave Camp -- and to a much lesser extent, Senate Finance Committee Chair Max Baucus -- tried to transform all that political momentum into legislative action that would put the taxwriting committee at the center of public attention.

What are the obstacles that are so daunting to stand in the way of such powerful forces? Some are temporary. For example, as long as the administration continues to embarrass itself -- first with the revelation about the IRS treatment of Tea Party organizations, and now with a massive problems with the rollout of the Affordable Care Act -- leaders in the House don't want a big issue like tax reform distracting public and press attention.

Others obstacles are daunting but will eventually be pushed aside. For example, Democrats are insisting that tax reform raise revenue, while Republicans are insisting that tax reform be revenue neutral. Someday the gap between the two parties on overall revenue goals will eventually close -- if only because fracking or some other technological advance might boost the economy and shrink the deficit without any help from politicians (as it did in the late 1990s during the boom).

The more enduring difficulties for tax reform are hard-wired into the current system. Corporate tax benefits are heavily skewed toward manufacturing. Individual tax benefits are skewed to the middle class. This is not 1950 or 1970 or even 1985. Believe it or not, there are simply not enough loopholes in our system to significantly lower income tax rates unless Congress attacks the segments of the population and of industry that on most days of the year it says it wants to help.

There is one ember of tax reform that simply cannot be extinguished, however. Many of America’s most powerful corporations daily become more desperate to see their foreign cash returned to the United States with minimal U.S. tax. That mountain of money is growing by about $200 billion each year. That’s a lot of power and a lot of money, and you have to believe sooner or later a politically acceptable mechanism will be found. A repeat of the widely criticized, stand-alone repatriation relief of 2004 is unacceptable. The best chance of tax relief for that money is as a low-profile transition rule in a comprehensive tax reform package.

Read Comments (2)

john aceJan 5, 2014

giving illegals work cards and asking them to pay %10 on desent wages and %6 on
health care would help them and the country's debt.

Richard DunnJan 5, 2014

You should look at Thomson Reuters tax evasion through Europe, particularly
given that West publishes our country's legal books and on-line legal services,
while strategically evading tax by processing earnings through Switzerland.
Just another example of a company making money, this time through the court and
legal system, and then stashing it in Swiss accounts.

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