Tax Analysts Blog

Goodbye Baucus, Hello Wyden

Posted on Jan 6, 2014

In 1976, when Daniel Patrick Moynihan was first elected to the Senate, he opted for a seat on the Senate Finance Committee. When asked why, he responded, Willie Sutton-like, “Because that’s where the money is.” The Senate Finance Committee has jurisdiction over 99 percent of all revenue collected by the federal government and about half its spending. Moynihan became chair of Finance (as Capitol Hill people call it) in 1993 and 1994 and remained the top Democrat on the committee until his retirement in 2000. The current chair, Democrat Max Baucus of Montana, has been the chair or ranking minority member ever since.

Much to the credit of its leaders, power on the Finance Committee is generously shared with the party in the minority. So when control of the Senate changes from one party to another, the chair of Finance may change, but the ranking minority member is not shunned to obscurity and stripped of staff (as happens in the House Ways and Means Committee), but retains almost as much influence as the chair. So for the last 13 years, Baucus has been the Senate’s number one or number two taxwriter, depending on which party is in control.

Baucus won't complete the last year of his final Senate term that ends in 2014 because President Obama is appointing him ambassador to China. (In addition to handling all the money, Finance is also in charge of trade policy.) Sen. John D. Rockefeller IV of West Virginia, the next most senior Democrat, is retiring at the end of 2014 and is not interested in being Finance chair for the waning moments of his 30-year Senate career. That means 62-year-old Ron Wyden (D) of Oregon will be the next chair of the Finance Committee.

Much of the criticism you hear about Baucus has come from the left wing of his party, which complains about his conservative stance on many issues. That always struck me as a little silly. Montana is a solidly red state. Obama lost it by 15 percentage points in 2012. Democrats are lucky to have a senator from Montana. They will miss Baucus when he's gone in 2015 if - as seems increasingly likely - they lose control of the Senate and Wyden will have to change places with current ranking minority member Orrin Hatch of Utah.

The real problem with Baucus is that for 13 years he has occupied a powerful and prestigious position of leadership on the Finance Committee, but until recently, he has made no measurable progress on tax reform. He has given a lot of speeches on competitiveness. He has held a lot of hearings. But until the recent release of four tax reform discussion drafts -- on international tax, tax administration, depreciation, and energy incentives -- he has done little to make the tax code simpler, fairer, or more efficient.

For example, in January 2006 he gave a speech at the National Press Club in which he stated:

      The tax code rightly contains a number of anti-abuse rules, so that companies cannot shelter passive income. We must also allow U.S. businesses to redeploy resources from active foreign corporations, as their competitors already do. I will review those rules, as well as the transfer pricing rules, cost recovery periods for business assets, and the inappropriate use of offshore tax havens, to make sure U.S. businesses are able to compete fairly and on a level playing field with both domestic and foreign competitors.
That was all big talk and no action. With all the resources and power of the committee at his fingertips, it took Baucus seven years to release a preliminary “staff discussion draft” on international reform. This only came more than two years after House Ways and Means Committee Chair Dave Camp released his pioneering international tax reform discussion draft. It came only after a huge surge of public interest in tax reform in general and in international issues in particular. On tax reform, Baucus clearly has been a follower, not a leader.

In 2005 the Finance Committee had a real opportunity to make progress on the most controversial issue in corporate taxation: multinationals' profit shifting to tax havens through aggressive transfer pricing. For over a year the committee staff had been conducting an in-depth investigation of the IRS advance pricing agreement program, under which many transfer pricing cases were being settled. Baucus said before the study’s completion: "I encourage interested parties to wait and review the full report before drawing any conclusions from the APA program." But the study, reportedly highly critical of the IRS program, was never reviewed by anybody in the public because it was never released! Leadership on this critical issue, by default, passed to a non-taxwriting committee, Michigan Democratic Sen. Carl Levin's Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations. Levin's multiyear efforts culminated this May with a hearing on Apple’s transfer pricing practices. Again, Baucus has not been a leader.

In contrast, Wyden made tax reform a signature issue many years before Bowles-Simpson put it on the front burner. In many ways he is like a modern-day Bill Bradley, who, as a Democrat on the Finance Committee, devoted himself to tax reform long before anybody thought that tax reform in the 1980s was possible.

Moreover, unlike so many other tax reform cheerleaders who are afraid even to hint as to how they would pay for tax reform, Wyden developed a detailed plan with specific revenue raisers. And even better, he did it with Republican cosponsors -— first with Sen. Judd Gregg before he retired in 2010 and then with Sen. Dan Coats (R) of Indiana.

Probably nobody has been more skeptical about the chances of enactment for tax reform as I have. So I am not inclined to give readers a lot of happy talk about its chances. But I believe the emergence of Wyden will do a great deal to raise the profile of tax reform on Capitol Hill. Republicans are always interested in tax reform. What tax reform has been missing is a devoted Democrat. Even if Wyden loses chairmanship of the committee in 2015 with a Republican takeover of the Senate, he has a good working relationship with Hatch. And he has a good working relationship with House Republican Paul Ryan of Wisconsin, whom he has worked with on Medicare reform. Ryan wants to become the next chair of the House Ways and Mean Committee when Camp's term-limited chairmanship is over at the end of 2014.

This potential alignment of the right personalities is a positive development. But nobody should mistake it as much more than a glimmer of hope for the future of tax reform. Tax reform is a brick wall shrouded in a smoke screen. Politicians and the public repeatedly plunge headlong into it and then find out how hard it really is. The political difficulties of tax reform are demonstrated by Wyden’s own plan. On the individual side, his top rate was 35 percent -- hardly a showstopper that the public and other legislators can rally around. The corporate portion of his reform was far more dramatic. He reduced the rate from 35 percent to 24 percent. But that came at the cost of immediate taxation of all foreign profits, limitations on interest deductions, and elimination of the preference on capital gains and dividends. These are nonstarters in the business community and among conservatives. Certainly Wyden is determined, and he is willing to think outside the box. But the vested interests he must challenge to get any significant rate reduction still make major tax reform a quixotic effort.

Read Comments (4)

Richard Weidel, los angelesJan 6, 2014

Hello Marty, goodby nobody, Dear Mr.
Sullivan, saw you on cable last night in L.A./ Gosh, Thank you for the gift,
Yes, please continue to do your great work, appreciate and gives us hope for
our country, rich

Carl OlsonJan 6, 2014

Dear Mr. Sullivan:

Congrats on your CSPAN interview.

This article has vast tax implications.

Great victory for pension funds against fraudulent companies and CPA auditors
from 2008 financial debacle--such as AIG, Fannie Mae, Freddie Mac, Lehman
Brothers, etc. Billions await lawsuits for pension funds which act.

Ohio's pension funds were deceived by Fannie Mae and its CPA auditors KPMG.
$153 million has been awarded in lawsuit.

http://legaltimes.typepad.com/blt/2013/12/judge-approves-153-million-set...
in-fannie-mae-securities-class-action.html

All state, local, and private pension funds and others can now be heartened to
sue for their losses from fraudulent companies and their CPA auditors. The
County of Santa Clara (Calif.) started a similar suit a couple years ago against
Lehman Brothers executives and Ernst & Young. Here are some of the obvious
targets:

1. PricewaterhouseCoopers -- AIG, Freddie Mac
2. Deloitte & Touche -- Merrill Lynch, Fannie Mae, Washington Mutual, Bear
Stearns
3. Ernst & Young -- Lehman Brothers, IndyMac Bank
4. KPMG -- Countrywide, Wachovia

Billions of dollars are awaiting to the taxpayers and others in such lawsuits.

Carl Olson
Founder, www.cpawatch.org
P. O. Box 6102
Woodland Hills, CA 91365
818-220-8080

There are three major tax implications:

1. Fannie Mae will need to record costs of payouts, which will reduce its
income tax liability. Did Fannie Mae mention this case in its financial
statement notes? Any 10-K description?

2. The CPA auditor KPMG shares liability for the payouts. This should also
reduce the income tax--but for which years: 2008, 2013, or what. CPA auditors
are very heavily covered for malpractice insurance. It is so large as to be
about 15% of revenues. It should reduce the losses for KPMG.

3. The malpractice insurance industry for CPA auditors will take a major hit
for payout. There should be plenty more in the years ahead as other pension
funds sue for fraudulent/misleading statements and audits. If any of these
insurance firms are publicly-traded, there should be major disclosures
available.

Let me know what you think.

Mary StewartJan 7, 2014

I am old. I don't know a lot abouc economics and tax codes, just know I pay a
lot for being old and retired. Was impressed by your C Span interview. You
were great.

Terry LyleJan 10, 2014

I also was most impressed with your C-Span interview. You came across as fair,
non-partisan, and non-ideological. Quite impressed that you didn't react to
Brian Lamb's attempts to get you to make partisan statements.
Plus you came across as most sincere. You exhibited true patriotism, not the
affected patriotism spouted by the bloviators in Congress.

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