Tax Break

Trying to move a mountain: Why Congress debates tax reform in an election year

March 8, 2012

Max Baucus, chairman of the Senate Finance Committee REUTERS/Kevin Lamarque

Tax reform is coming! 

Many people say that momentum is building to revamp the tax code, but the pace can seem glacial on Capitol Hill.

Nearly everyone agrees the tax code needs a rewrite but they also agree it won’t happen in an election year.

In an effort to lay the groundwork, congressional leaders held another set of major tax reform hearings this week, dragging experts into Capitol Hill hearing rooms to discuss something that’s less likely to hit DC than a blizzard in March.

“It is going to be politically difficult … but nevertheless we have to try,” Democrat Max Baucus, chairman of the Senate Finance Committee, said on Tuesday at a hearing examining tens of billions in annual deductions and credits companies now enjoy – and whether they are worth the cost.

Since the last tax code revamp in 1986, the code has been larded up with hundreds of new provisions favoring selected individuals and industries over others. With deficits over $1 trillion and many businesses clamoring for a lower corporate rate, many believe the time will be ripe in the next few years to overhaul the code.

So tax-writers in Congress continue to weigh a broad overhaul of the U.S. tax code, including a cut to the top 35 percent corporate tax rate, among the highest in the industrialized world. To prevent such a revamp from bloating the already high U.S. deficit, certain tax deductions, credits and other benefits may need trimming, some economists say.

Accelerated write-offs for business expenses, and a deduction for American manufacturing, are among the major tax breaks companies enjoy in the U.S. tax code.

Research suggests that investment incentives have had mixed impact on spurring additional investment, Jane Gravelle, an economist with the Congressional Research Service, told the senators.

“We need to look at trying to make our tax code simple and efficient and that is really all we can do,” Gravelle said. “We can’t move a mountain.”

Others said the provisions should not be viewed as “breaks” or “loopholes” but as essential policies to keep the United States competitive with rival nations.

“Not all tax ‘distortions’ are harmful to growth,” said Robert Atkinson, president of the Information Technology and Information Foundation, a think tank that gets about 60 percent of its funding from technology related companies.

Over on the House side, Ways and Means Chairman Dave Camp looked at the tax benefits and perils of businesses that form partnerships and other business models, and how that would fit into a revamp of the code.

The debate turned in large part into the familiar dispute between Democrats and Republicans on raising the individual tax rates on high income earners – those making more than $200,000.

That ropes in some business owners – two to three percent, according to congressional estimates.

Obama’s proposal to revamp corporate taxes suggests that forcing these business owners over a certain threshold to file corporate income taxes could help raise revenue to lower corporate rates for everyone.

That would subject more businesses to two layers of tax – one at the corporate level and another at the shareholder level.

“Isn’t it better to have fewer business entities subject to double taxation,” Camp asked the panel.

Most of the witnesses, business owners called by Camp to testify, said yes.

Democrats say those in the highest income brackets in large part are not small businesses and do not need special protection.

They cited a Joint Congressional Tax Committee report finding that among partnerships – which include law firms and investment funds like private equity firms – a vast majority have assets of more than $100 million. Partnerships file through the individual side of the tax code and would be subject to higher tax rates under proposals by Democrats to raise the rates on high-earners.

“Among wealthy, high income households, most of their income … has nothing to do with small business,” said economist Martin Sullivan, a witness for the Democrats.

Stay tuned for the next set of hearings…

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