Feb. 3 (Bloomberg) -- President Barack Obama and congressional leaders haven’t determined a clear path to an overhaul of the U.S. tax code, in part because no one wants to be the first to propose taking away popular tax breaks.
This reticence, say veterans of the last major rewrite of the tax code in 1986, stems from worries about how this issue may play out in the 2012 election.
Given that, there must be some “shame factor” in failing to act on a tax code overhaul, or it is unlikely to occur in this election cycle, Eugene Steuerle, co-director of the nonpartisan Tax Policy Center in Washington, said yesterday.
“It’s got to be the pain of not going to the dentist at some point being greater than the pain of going to the dentist,” said Steuerle, who helped advance the 1986 tax overhaul as economic coordinator at the Treasury Department under President Ronald Reagan. “And they’re all scared of going to the dentist.”
So far Obama has focused his remarks on corporate taxes. In his Jan. 25 State of the Union address he said the corporate tax code has become riddled with “loopholes” because of the influence of a “parade of lobbyists.”
Behind the Scenes
Obama hasn’t offered details for an overhaul of the tax system. Behind the scenes Vice President Joseph Biden and Treasury Secretary Timothy Geithner recently have discussed the tax code with members of Congress, business leaders and academics, a process administration officials say is continuing.
Details may emerge in Obama’s speech to the U.S. Chamber of Commerce on Feb. 7, or in his fiscal 2012 budget submission on Feb. 14. Administration officials haven’t tipped their hand.
Senator Robert Menendez, a New Jersey Democrat and member of the tax-writing Finance Committee, said his panel has begun the overhaul process by holding a series of hearings. He said leadership from the other end of Pennsylvania Avenue would speed up the process.
“It would be helpful to get some directives from the White House on what they’re thinking,” Menendez said.
Further complicating a tax-code rewrite is how to deal with marginal tax rates for an estimated 30 million business owners organized as “pass-through” entities that pay taxes as individuals rather than as corporations.
For this reason, House Ways and Means Chairman David Camp, a Michigan Republican, and Senator Orrin Hatch of Utah, the senior Republican on the Finance Committee, want to cut taxes for corporations and individuals at the same time.
Popular Tax Breaks
Reducing tax breaks on the individual side of the tax code, such as those for home-mortgage interest and charitable donations, would be politically unpopular.
“Doing corporate tax reform is easier,” said John Chapoton, who was assistant Treasury Secretary for tax policy in Reagan’s administration.
Hatch said he and Senate Finance Chairman Max Baucus, a Montana Democrat, may craft legislation to overhaul the tax code. Hatch said that isn’t an ideal approach and he would prefer that White House officials make a specific proposal, unlike during the health-care debate when the administration outlined general principles and left the details up to Congress.
“The White House hasn’t been very good at providing specifics on health care and a whole raft of stuff,” he said.
Camp spokesman Sage Eastman said discussions on a tax overhaul have continued between the two chambers and with the White House, and the Ways and Means panel is planning more hearings.
“Are we in the early stages? Yes. But make no mistake, the ball is rolling,” Eastman said, adding it will take a combination of House action and “continued presidential leadership” for an overhaul to move forward.
Another approach is one favored by President Ronald Reagan, Chapoton said. After pledging to overhaul the tax code during his 1984 re-election campaign, Reagan directed the Treasury Department to develop a proposal, which was unveiled in December after the election. The proposal drew opposition and was refined before being submitted to Congress in May 1985.
“The problem there was that the report was in excruciating detail, so everybody could see who was hurt,” said Chapoton, now a partner with Brown Advisory, a wealth-management firm in Washington. “But it certainly ended up staying alive.”
Meanwhile, Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, maintains that taxes and spending cuts should be considered simultaneously, as recommended by members of Obama’s fiscal commission in December.
“We really ought to have a whole package,” Conrad said. “It’s the only way it can make any sense.”
Democratic Senator Ron Wyden of Oregon, the only sitting member of Congress to introduce a detailed tax-code overhaul measure, said a bipartisan tax deal can occur in an election cycle.
“In ‘86, both sides won,” Wyden said. He points to government data that 6.3 million total non-farm jobs were created in the two years after enactment of the 1986 tax law, compared with 3 million during President George W. Bush’s two terms in office.
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