Washington INsider

Washington INsiderblog

Mark Schoeff Jr. looks at what's really happening on Capitol Hill - and the upshot for advisers.

How the budget battle greases the skids for a tax overhaul

Making Bush cuts permanent creates foundation for comprehensive code rewrite

Jan 7, 2013 @ 3:03 pm

By Mark Schoeff Jr.

taxes, fiscal cliff
+ Zoom

It took intense last-minute negotiations, early morning and late night votes and hours of politically charged caucus meetings for Congress to do something relatively easy – avert a plunge over the fiscal cliff by approving a bill that preserved tax cuts for nearly 100% of Americans.

Even before the final “aye” and “nay” been cast on the fiscal-cliff bill, Republicans and Democrats were girding for the next fiscal war over paring the massive federal deficit and debt.

The verbal jousts were amplified this past weekend, as Senate Minority Leader Mitch McConnell, R-Ky., appeared on three Sunday news programs to warn President Barack Obama that the GOP would demand deep spending cuts over the next couple months in order to raise the federal debt ceiling and keep the government operating.

In the midst of these battle cries, however, there is a quiet but growing chorus of optimism that Washington can take on an issue that is much more complex and fraught with political pitfalls than debates over the fiscal cliff and federal spending.

Lawmakers and experts believe that Congress can tackle comprehensive tax reform in 2013. The fiscal-cliff bill provided the foundation for such a debate by making many of the Bush tax cuts permanent.

One of the lawmakers who will be instrumental in tax reform was hopeful just before the House voted to approve the fiscal-cliff bill.

“This legislation settles the level of revenue that Washington should bring in,” Rep. Dave Camp, chairman of the House Ways & Means Committee, said in a floor statement on Jan. 1. “Next, we need to make the tax code simpler and fairer for families and small businesses. So, by making Republican tax cuts permanent, we are one step closer to comprehensive tax reform that will help strengthen our economy and create more and higher pay checks for American workers.”

The fiscal-cliff bill determined the “baseline” from which tax reform discussions can start, according to Jon Traub, managing principal of tax policy at Deloitte Tax LLP and a former aide to Mr. Camp.

Prior to congressional action last week, one of the biggest obstacles to tax reform was sorting out whether the starting point was a tax code that included the Bush tax cuts or one that let them expire.

Now that that question has been settled, it easier to determine how much “revenue” there should be in a “revenue neutral” tax overhaul, Mr. Traub writes in a recent analysis.

In addition, as Mr. Traub points out, Senate Finance Chairman Max Baucus, D-Mont., notes that the fiscal-cliff bill did not change policy toward so-called tax expenditures – such as retirement-savings incentives – nor did it address corporate tax reform. Both of those big items remain on the table for comprehensive tax reform.

Even the fight between President Barack Obama and congressional Republicans over further tax increases and spending cuts could find a resolution in broad tax reform, according to Mr. Traub.

“[W]ith House Republicans highly unlikely to agree to any legislation that increases tax rates and President Obama pledging in a statement delivered shortly after the [fiscal-cliff bill] passed the House that future efforts to reduce the deficit will not rely solely on spending cuts, the parties are likely to find tax reform one of the few ways to accommodate these competing interests,” Mr. Traub writes.

If Congress does undertake tax reform, it's likely to be even more dramatic than the fiscal-cliff machinations, with hundreds of lobbying groups protecting their favored tax breaks and lawmakers splitting along both partisan and regional lines to shield the parts of the code most important to them.

But at least the chances are good that Congress will start down the tax-reform path in 2013.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Sep 26


Investing 2017: Industry at a Crossroads

The advice industry is at a unique inflection point, as the way clients are investing has changed dramatically: Technology has evolved, access to innovative products has changed, and the active vs. passive debate continues to rage on. Advisers... Learn more

Featured video


Picking your spots in emerging markets

Not all emerging markets are created equal. Ted Lucas of the Hartford Funds explains where the smart money is headed right now (and into the future.)

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Video Spotlight

Path to growth

Video Spotlight

Path to growth

Latest news & opinion

What not to say to clients when the markets drop

Here's what advisers should steer clear of saying the next time stocks turn downward.

SEC bars former rep for alleged share price manipulation

George Thoreson tried to keep penny stock's price high to enable Nasdaq listing.

A special need for financial advice

Advisers don't have to be experts to help special needs families get a jump on lifelong planning.

Broker-dealers and RIAs at loggerheads over fiduciary rule delay

Companies and groups weighing in with comment letters have vastly different viewpoints on the delay's potential impact.

7 conferences taking advisers beyond financial services

Consider investing some time in learning to build corporate culture, be a better listener and other important skills.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print