Without road map, tax reform veers all over

New Year’s Eve legislation that averted trillions of dollars of automatic tax increases and spending cuts was brimming with provisions that permanently extended many Bush administration tax cuts. What was missing, however, was language that provided direction on broad tax reform.

Many months ago observers had anticipated that the fiscal-cliff agreement would include a roadmap for an overhaul of the tax code, complete with an expedited timeframe to get bills through the House and Senate. Instead, the measure was silent on further reform.

Just like nature, politics abhors a vacuum. Within weeks of the opening of the new Congress earlier this month, all kinds of ideas are filling the comprehensive-tax-reform void.

One of the efforts to watch is being undertaken by House Ways & Means Committee Chairman Dave Camp, R-Mich. He is in a pivotal position to make reform happen.

Last week, Mr. Camp released the opening salvo in the effort, a “discussion draft” of legislation that would simplify and streamline the taxation of financial products, including derivatives, bonds and securities. It’s a fastidious, thoughtful way to open comprehensive tax reform. For instance, Mr. Camp would tighten the way that the taxable gain or loss on securities sales is determined.

“Updating these tax rules to reflect modern developments in financial products will make the code simpler, fairer and more transparent for taxpayers; and it will also help to minimize the potential for abuse that has occurred in the past,” Mr. Camp said in a statement.

Mr. Camp has put out the discussion draft to solicit comments from experts, practitioners and the public. It’s the beginning of what he promises will be a deliberative process.

On the other end of the tax-reform scale is a bill introduced by Sen. Richard Shelby, R-Ala., on Tuesday – the Simplified, Manageable and Responsible Tax Act – that would scrap the entire tax code and replace it with a flat tax of 17% with four major exemptions — $14,070 for a single person; $17,970 for the head of a household; $28,140 for a married couple filing jointly and $6,070 per dependent.

“With the SMART Act in place, taxpayers would file a return the size of a postcard,” Sen. Shelby’s office said in a statement. “There would be no more long hours spent poring over convoluted IRS forms and no more fees paid for professional tax assistance.”

Mr. Shelby dropped the flat-tax bill into the hopper along with one that would add a balanced budget amendment to the Constitution. This combination is what he called a better approach than the fiscal-cliff deal, which he voted against.

Other radical tax reform comes in the form of a measure that would replace the income tax with a national sales tax. Like Mr. Shelby’s bill, that legislation is a long shot. The prospects of Democratic support are limited.

The tax changes ushered in by the fiscal-cliff bill — as well as the insistence by President Barack Obama that deficit reduction include more tax revenue, not just spending cuts – could dim the prospects even for the comprehensive, step-by-step reform that Mr. Camp is pursuing.

“All of that just complicates the code further,” said Andrew Friedman, principal at The Washington Update newsletter. “[Tax reform] is going to be a heavy lift, especially on the individual side. I don’t see anything happening in the next few months.”

Other than Mr. Camp continuing to forge ahead and his colleagues continuing to make political statements through tax bills.