JOHN SCOTT — A tax reform lump of coal: Democrats, Republicans far apart on any overhaul of the tax code; Or are they?
It’s the most wonderful time of year!
Everywhere you look, children are anticipating the arrival of Old St. Nick. The lights are up, and the stores are packed. Everyone is hoping to be judged as nice, not naughty, and receive a stocking full of presents instead of a lump of coal.
But, when the Jolly Old Elf makes his final list for 2013, coal will likely be the order of the day for the politicians tasked with making tax reform a reality.
For several years now, there has been a move afoot in Washington to reform and simplify the tax code. This year marks the 100-year anniversary of the federal income tax, and the 30-word brevity of the 16th amendment now stretches into a 4,000-page behemoth of small print. The regulations, rulings and cases interpreting the tax code dwarf that number.
So, some simplification would be a nice present – at Christmas time, or any time. Both the Republican – led House Ways and Means Committee and the Democrat-led Senate Finance Committee have held substantive hearings on the topic in 2013. Both broadly state that the path forward should include a reduction in tax rates for individuals and businesses in exchange for eliminating certain deductions and tax credits.
The President concurs.
There’s where the agreement ends. The Grinch is in the details.
Republicans would like to tie spending cuts with a reduction in tax rates to the 25-28 percent range. They also favor entitlement reform to slow the rate of spending increase in programs such as Social Security and Medicare. Lower tax rates, the thought goes, would help stimulate economic growth and generate an increase in tax revenues. When pinned down on which deductions and credits they are willing to eliminate, things get sketchy fast.
Democrats, on the other hand, would like to generate additional revenue from tax reform to cover increased spending, with little mention of entitlement reform. Some slight reduction in current rates would be more than offset by changes to and/or phase-outs of a number of deductions and credits targeted at specific industries and high-income individuals. Other taxes, such as on capital gains, would likely increase, not decrease.
The two sides are now far apart and reform and simplicity appear a lost afterthought. So, why is this even worth discussing?
Well, because in 1986, the last time there was a complete overhaul of the tax code, the arguments and positions were strikingly similar. And, once the ball started rolling, broad agreements were reached and compromises made, eliminating or reducing many deductions and credits while slashing both individual and business tax rates.
Many of these decisions were difficult and controversial, upsetting both Republican and Democrat core constituencies. They required political leadership from President Reagan and Congress and the ability to put the common good before party politics.
So, who thinks we could have a repeat today?
Coal, all around.
» John Scott, CPA, is a tax partner at HORNE LLP and has more than 25 years of public accounting
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