The Republican takeover of Congress following the 2014 midterm election has the potential to create gridlock with President Barack Obama on several key initiatives.
One possible exception? Broad-based tax reform.
Obama, Sen. Mitch McConnell, soon-to-be majority leader, and House Speaker John Boehner all have indicated that tax reform is a potential point of bipartisan agreement.
There is wide concensus among politicians and the public that the tax code is inefficient and unfair.
Though the rhetoric in Washington, D.C., may seem to favor a push on progress, broad-based individual tax reform is not possible in the short-term, though other opportunities for reform may still exist, says an expert on federal income tax and tax law at Washington University in St. Louis.
Here, Adam Rosenzweig, JD, professor of law, and author of the 2013 paper, “A Corporate Tax for the Next One Hundred Years: A Proposal for a Dynamic, Self-Adjusting Corporate Tax Rate,”
shares his thoughts on the possiblity of tax reform in the lame-duck session:
“Simplification of the tax law is often held up as the primary goal of any tax reform. The difficulty with simplification as a goal is that not everyone agrees as to what it means or how it should be accomplished. After all, a 100-percent tax on all income of every taxpayer is equally as simple as having no income tax at all. Thus, traditionally it has been very difficult to achieve any significant simplification through tax reform in the political process.
“The one exception, the Tax Reform Act of 1986, is often pointed to as the gold standard of tax reform and simplification. While the 1986 act added several complex provisions to the tax law, it achieved several goals of simplification. It significantly lowered the statutory tax rate on ordinary income for individuals and reduced the number of tax brackets. It equalized the tax rate applicable to ordinary income and capital gains. It did away with a number of complex personal deductions. This approach is often referred to as ‘broadening the base and lowering the rate.’
“Any new move towards tax reform will also likely involve some form of broadening the base and lowering the rate. Two difficulties arise in this context, however. The first has to do with who benefits and who loses under such an approach.
“A broader base means some people will pay tax on more of their income, while a lower rate means some people will receive a tax cut. As a political matter, not everyone agrees how this trade-off should be made.
“The second has to do with how to calculate the effects of tax reform. Traditionally, tax reform has been measured against current law as if nothing else changed. Thus, a cut in tax rate would result in an estimated loss in revenue. Some argue, however, that lower rates will stimulate higher growth, which should be taken into account in calculating the costs of tax reform. This so-called ‘dynamic scoring’ has been controversial, and could well prove a sticking point in any tax reform.
“For these reasons, broad-based individual tax reform along the lines of the 1986 act may not be possible in the short-term.
“However, there may be other opportunities. For example, one area where interests may align could involve lowering the corporate tax rate.
“The United States currently has the highest nominal statutory corporate tax rate of any OECD (Organisation for Economic Co-operation and Development) member country. In addition, there has been significant interest in preventing multinational corporations from avoiding U.S. tax through maneuvers such as ‘inversions’ and ‘Double Irish’ structures, among others. Thus, one potential compromise could involve lowering the corporate tax rate in exchange for cracking down on these types of corporate tax avoidance.
“The difficulty with corporate tax reform is that nobody knows who really bears the cost of corporate taxes. It could be shareholders through lower dividends or it could be workers through lower wages.
“Thus, it is possible that no agreement could be reached if there is no consensus on who would benefit and would be hurt by any corporate tax reform. One solution I have proposed in the past would be to tie the corporate tax rate cut to corporations increasing wages and salaries of workers.
“This could be a win-win, so to speak. Under that approach, corporations would receive a significant tax cut, but only on the condition that part of it go directly to workers in the form of increased wages or new hiring.
“Such a proposal could bridge the gap on corporate tax reform between those on the left and those on the right. In this modern economy and political climate, it may be necessary to think more creatively along these lines for any tax reform to occur, rather than to try to replicate what happened in 1986.”