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Tax Reform in This Election Year: It's Not Likely

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Tax Reform in this election year is unlikelyWASHINGTON (AP) - Tax reform sounds like a good idea to lots of people, but where to start? Eliminate the popular deduction for home mortgages? End the write-off for charitable contributions? How about expanding the Social Security payroll tax?

Not likely.

Politicians of all stripes in this presidential election year are clamoring for simplifying the tax code and closing loopholes. But that would mean Americans would lose some of their prized deductions.

Not that Congress actually is likely to end tax breaks for home loans or religious and charitable contributions anytime soon. President Barack Obama and his chief Republican challengers - Mitt Romney and Newt Gingrich - certainly aren't advocating that.

In fact, recommendations to trim the mortgage deduction made in 2005 by a tax-overhaul panel convened by then President George W. Bush and again in 2010 by a deficit-reduction committee set up by Obama were ignored by both those presidents.

Overhauling the complex U.S. tax code could mean that for everyone who would pay less someone else would pay more. And every existing provision in the code has its advocates.

"Tax reform is ferociously difficult. If you tackle it straight up, the likelihood of success is rather small," said Henry Aaron, a senior fellow in economic studies at the Brookings Institution. "Whenever you try to take money away from somebody, they will fight harder to keep it than will those who stand to gain."

And if deficit reduction is also a goal, it makes the job even harder.

Most recently, a bipartisan deficit-reduction congressional "supercommittee" failed to meet a Thanksgiving 2011 deadline and had to disband when it could not find common ground on tax changes.

None of the major tax overhaul proposals now on the table seems likely to be enacted given the current political rancor in Washington.

Of course, a lot could depend on the outcome of the November elections.

For now, the urgency for both parties is focused on the Bush-era tax cuts, scheduled to expire at year's end. Republicans generally want to make them permanent. Democrats would like to raise taxes on the wealthy but keep them at present levels for all others.

The income tax as we now know it has been around for nearly 100 years, and it's had only a few major overhauls.

The last major restructuring came in 1986, when Republican President Ronald Reagan and Democratic House Speaker Thomas P. O'Neill were able to put aside their political differences to strike a grand deal that both simplified the tax code and lowered rates on most individuals.

"To get comprehensive tax reform, you have to have tremendous presidential leadership. There's no way around that to be successful," said Douglas Holtz-Eakin, who was the director of the Congressional Budget Office from 2003 to 2005 and now heads the American Action Forum, a conservative public policy institute.

In addition to being a hot issue on the campaign trail, tax reform is also being closely studied by congressional leaders who oversee tax-writing, Holtz-Eakin said. "So with all the key players all saying 'Let's do it,' I think that's promising."

"Now the next issue is, what is 'it'?" There, we don't have a consensus," he added.

Obama has proposed ending tax breaks for U.S. companies moving jobs or profits to foreign countries. He also would create a minimum tax on their overseas earnings. And he has suggested new tax breaks for businesses that move jobs back to the U.S., for domestic manufacturing and for companies that invest in towns that have suffered major job losses. But getting most attention is his plan to tax personal incomes above $1 million - including investment income - at a rate of at least 30 percent.




"Washington should stop subsidizing millionaires," Obama said in his State of the Union address. "Send me these tax reforms, and I'll sign them right away."

Obama also wants to see corporate taxes lowered but hasn't said by how much. The White House has signaled he'll unveil details on Feb. 13 when he submits his budget for the fiscal year that begins Sept. 1.

The nominal corporate tax rate is 35 percent, the highest in the world after Japan. However, few companies pay that much after taking various deductions. Because of recent special deductions in the government's stimulus programs, including the ability to write off the full cost of purchases of new equipment, corporations last year paid just over 12 percent on average. That is expected to rise to about 26 percent this year, according to Congressional Budget Office calculations.

Romney would make permanent most Bush-era tax cuts and would eliminate taxes on interest, dividends and capital gains for those earning under $200,000. He would lower the corporate tax rate to 25 percent.

Jobs and tax reform have been leading issues in the GOP primaries so far. Most Americans believe that the tax system is unfair and would like to see it changed, recent polls suggest. The polls show a majority believe upper-income Americans pay less than their fair share, although far more Democrats believe this than Republicans. There is also a big political divide over whether to keep the current system of taxing investment income - such as dividends and capital gains - at lower rates than wages. Far fewer Democrats than Republicans want to keep things the way they are, polls show.

Romney, one of the richest presidential candidates ever, recently disclosed that he paid federal taxes at an effective rate of around 15 percent because most of his income came from investments that are taxed at that rate, compared to a top rate of 35 percent for wages. That disclosure has helped fuel the recent surge of interest in tax reform.

Gingrich would let people choose whether to file under the current system or pay a 15 percent "flat" tax while preserving the mortgage interest and charitable deductions. He would eliminate the capital gains and estate taxes and would cut the corporate tax rate to 12.5 percent.

Former Sen. Rick Santorum, R-Pa., would reduce the number of tax brackets to two - 10 percent and 28 percent, exempt domestic manufacturers from the corporate tax and halve the top rate for other businesses. He would triple the personal exemption for dependent children.

Rep. Ron Paul, R-Texas, would eliminate the federal income tax altogether. Also the Internal Revenue Service. He would vote for a national sales tax, and he supports certain excise taxes and certain tariffs.

The nonpartisan Tax Policy Center has said that the wealthy would be the biggest beneficiaries of the Romney, Gingrich and Santorum tax plans. The center did not evaluate Paul's plan

The Tax Reform Act of 1986 backed by Reagan and O'Neill reduced the number of tax brackets and lowered the top marginal tax rate to 28 percent from 50 percent (it's now 35 percent).

The reduction in individual taxes was in large part paid for by repeal of the investment tax credit, which effectively raised corporate tax payments to the Treasury by 25 percent, or about $100 billion a year in today's terms.

But the political climate was far difference in 1986. Reagan was a popular second-term president with a good working relationship with Congress. The deficit was under control and the economy was growing, not limping like now.

Economist Bruce Bartlett, author of "The Benefit and the Burden: Tax Reform - Why We Need It and What It Will Take," is not optimistic for major tax reform no matter who wins the election.

"I think the most we can hope for is a modest improvement to fix some glaring problems in the code," he said.

As to those calling for starting from scratch with a whole new tax system such as the so-called fair tax or flat tax, "I don't believe that's going to happen," Bartlett said. "I think that's just a political non-starter."

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dumasjohnj

Billionaires should have a net worth tax, they do not take a large percentage as income.

February 13 2012 at 5:33 AM Report abuse rate up rate down Reply
ajt1025

The politicians would never fix the tax problem we have in this country. It would make things fair for all. I would like to see a flat tax on everyone even the lazy people that have been collecting wellfair for genteration now. Everyone pays a flat tax no cuts, no deduction, and nobody is excluded. That is fair to all Americans but the rich and the politicians that love to keep playing games with the working people this can never happed. Our government and its politicians are currupt and make no bones about it. Our politicians would rather spend billions if not trillions of dollars overseas seeing that other countries do better then we here in the Great United States of America. All the money leaving this country should stop, and the unfair laws of trade be abolished. Make thing simple and have the same laws that governs our good into other countries the same as bringing in good for overseas. Well that is so simple that it will never happen. Our politicians are spineless and have no morals, or ethics and worry about everyone else but the American People. We need to stop sending lawyers to Washington and our State Houses and put scolars and businessmen in office and make big changes. All one has to do is look to the Post office, Well fair system, SS system and see how much the government has screwed these departments up. All the departments that make up our government are not need and should be shut down and let people find jobs in the pvt sector and see what it is like to earn a real pay check.

February 11 2012 at 10:03 PM Report abuse +1 rate up rate down Reply
1 reply to ajt1025's comment
Rkymtnmary

This is an excellent summation. This hdyra aka as Congress will continue to replicate until we stop them from doing so and the way we do that is to not return any incumbents whatsoever and to speak in one voice to show our collective displeasure. Will that happen? I, for one, am not holding my breath. Our education system is ranked somewhere around 25-32 standing in the world. Yes. The United States of America. That was never us...but it is now. What does that tell you? How could that happen? For one, people don't know their history. They say they want things and don't even know enough history to be able to define the ideology they're spouting. Rhetoric, spin, advertising, entertainment media, pick your channel of bias, right wing, left wing. It. does. not. matter. They are both corrupt. They lie and they spin on both sides. Surely there must be some sane and rational men and women out there who can work on creating solutions. That is not going to happen in Congress. It hasn't so far. What makes us think it can happen now? Election reform. And vote every incumbent...yes, EVERY incumbent out. Even if we can't see the future clearly now, we can at least start with a clean slate. We have to begin somewhere. Turn off your mindless tv channels. Get your news from unbiased journalists. That is not Huffington Post. This is just play time. We need to face reality as Americans and understand at the very least that the Roman Empire fell. It is inevitable. History repeats and repeats and repeats until something gives in human nature and some leader somewhere facilitates change. We don't have that now. In either party. Who can come forward and lead the way out of our ultimate fate if we don't wake up and do so right now? I don't know the answer to this but I certainly know what it's not and it's not anyone in Congress or anyone currently running unless some major, and I mean major compromises that are healthy ones be reached. The talking points aren't real. They're just what they are. Talking points. I don't know about anyone else but I'd rather have a knock down verbal shouting match with someone with opposing views than to stand by and watch the apathy that continues in this country for a number of very complex sociological, political and economic issues. We didn't get here overnight. So people need to begin to think. Not react. Think. Critically. Because right now, we are IN critical condition as a country and at the very least, we have to halt the disease process. How? Peacefully. At the ballot box. If you believe the elections are tampered with? Then get out there into your local polling place and claim your right to view the tallys. Know the laws. Know the Constitution. Know our history. Know our values, and dreams and ideals. If you don't know those things, then you don't know when they're being violated and then you're nothing but an empty barrel making noise. i dunno...Good luck, everyone.

February 12 2012 at 12:18 AM Report abuse rate up rate down Reply
dadofoh49

I doubt it will ever happen with either Party. Politicians make and use too much money having the tax tables the way they are. Redoingtaxes has been a campaign promise for years

February 11 2012 at 10:02 PM Report abuse rate up rate down Reply
cmf725

It is time to clean house. We need term limits in the House and the Senate. We need no laws passed that exempt the House oe the Senate. We neee a graduated flat tax period! No exemptions, no credits, nada. Tax exemptions and tax credits are just the governments play at social engineering - but a house, buy solar panals, use x or y and we'll help you.

With a graduated flat tax everyone pays something and those with more don't get additional benefits because they can afford to invest in them. The only thing I would consider is a seperate rate for business who manufacture things in America. It's time for "Made in America" to mean something again.

February 11 2012 at 9:58 PM Report abuse rate up rate down Reply
dchristman51

What is difficult to know about a flat rate of 15% for everybody. No fuss no muss, everybody does the same tax form. Investment is already taxed, therefore capital gains are twice taxed. Rather then forcing people to "hide" their money, why not, at the initial investment let that money be tax free, and when there is a capital gain, tax it at 10 to 15%, thereby generating a lot more revenue than you are now.

February 11 2012 at 9:53 PM Report abuse rate up rate down Reply
fesambay

Where to start. Throw it all out. Then make all income taxable at given rates for income amounts. None of this capital gains or carried interest. No matter where income comes form it is all income. Do not gived s--t about investment because that is just a way the rich get ot pay less taxes then the rest of us. Make every dollar taxable.

February 11 2012 at 9:36 PM Report abuse +2 rate up rate down Reply
klpatrick4

The worrysome thing for me is that the promises most of these GOP candidates are making, are not priorities that the country has time for. We have conditions in place right now that need much more urgent attention than gay marriage, or contraception. We have an economy in near collapse, and I haven't heard anything that comes close to a logical or workable solution. We're in BIG trouble!

February 11 2012 at 9:31 PM Report abuse rate up rate down Reply
1 reply to klpatrick4's comment
Rkymtnmary

Yes we are in big trouble and I agree that those issues are nothing more than repeated cycle wedge issues. It is not the party itself, it is how the media spins their beliefs...both sides. The media is as corrupt as Congress is. We have lost the Fourth Estate. It happened in the middle of the night and no one saw it. So let's put the blame where it belongs which is on us for continuing to return these people, who do not represent who we are back to a job with inflated salaries, benefits we could only dream of....for life....and impose term limits on new ones. End of story.

February 12 2012 at 12:25 AM Report abuse rate up rate down Reply
SMFlooring

Ron Paul,Ron Paul, Ron Paul

February 11 2012 at 9:31 PM Report abuse +1 rate up rate down Reply
1 reply to SMFlooring's comment
Rkymtnmary

The Republican Ralph Nader.

February 12 2012 at 12:26 AM Report abuse rate up rate down Reply
SMFlooring

Ron Paul 20112

February 11 2012 at 9:31 PM Report abuse +1 rate up rate down Reply
SMFlooring

Ron Paul

February 11 2012 at 9:30 PM Report abuse +1 rate up rate down Reply