This much is true: Both President Obama and top Republicans are saying the right things about tax reform right now.
Whether that means that the two sides will make the progress in 2015 necessary to overhaul the tax code before Obama leaves office is another question entirely.
Incoming Senate Majority Leader Mitch McConnellMitch McConnellCruz, Lee, Paul demand 'full repeal' of ObamaCare Senate votes to advance Trump's nominee for Interior secretary Dem leaders try ‘prebuttal’ on Trump MORE (R-Ky.), has said that tax reform is on the short list of issues – also including trade and infrastructure improvements – with the best chance for bipartisan cooperation once Republicans take full control on Capitol Hill in January.
And Rep. Paul RyanPaul RyanDem leaders try ‘prebuttal’ on Trump Ryan, McConnell predict ‘positive, upbeat’ message from Trump Retired generals urge Congress not to cut funds for diplomacy MORE (R-Wis.), who will be the House’s top tax writer this year, has said he’s willing to compromise on one of the GOP’s top priorities for reform – that the individual and corporate systems be revamped together.
The problem for both sides is that getting your principles aligned on tax reform is the easy part.
As House Ways and Means Chairman Dave Camp (R-Mich.) showed when he unveiled a draft overhaul last year, it’s much harder to find common ground once the details start getting discussed. And while Ryan has said that he’s willing to work with Obama on tax reform, he’s also been far from confident those discussions will lead to anything.
Here, then, are areas of agreement between the GOP and Obama on tax reform, and the challenges they still face in making changes to the code.
Areas of Agreement:
Lower the rates, broaden the base: On the most basic of questions, Republicans and Democrats agree that Washington laid down the right template the last time it revamped the tax code in 1986.
Tax reform, both sides say, means cutting or modifying some of the myriad tax breaks currently in law. And at least some of that revenue, Democrats and Republicans believe, should then be used to pay for lower tax rates.
The corporate rate is too high: The tax rate for corporations currently tops out at 35 percent, just about the highest in the industrialized world. Republicans want to slash that rate down to 25 percent, while Obama proposed cutting it to 28 percent in a draft discussion on tax reform in 2012.
Top White House officials like Jason FurmanJason FurmanEconomy adds 227K jobs in January All things considered, TPP would've been a plus for US economy White House warns AI could heighten inequality MORE, the chairman of Obama’s Council of Economic Advisers, have pointed to that agreement as they talk up the chances for tax reform, saying there’s significant overlap between the two sides.
Business first?: The White House has long focused on revamping the tax code just for businesses, especially after fighting for Obama’s entire first term to raise taxes on the highest-earning individuals.
Republicans have long questioned that idea, in large part because many businesses – known as pass-through entities – pay taxes as individuals and would be left behind in a corporate-only overhaul.
But Ryan said this month that getting halfway on tax reform – that is, revamping the code only for businesses – would be better than nothing. Both parties also agree that any such overhaul would have to deal with those pass-through businesses, whose tax breaks would also be on the chopping block in reform talks.
Some tax breaks are good: Both the White House and a bipartisan group of lawmakers are strong backers of the popular tax credit for business research.
The end product: Tax analysts have said for years that one of the biggest obstacles for reform is that Republicans and Democrats don’t have the same vision for the American tax system.
Democrats pocketed roughly $600 billion in higher revenues from the fiscal cliff deal signed in early 2013, and still believe the government needs to raise more. Republicans generally opposed the fiscal cliff deal, and are dead-set against using tax reform to raise any more revenue.
What to cut?: They might agree on the need to lower the corporate rate, but Democrats and Republicans appear to have very different ideas of how to get there.
Democrats, for instance, believe any tax overhaul should contain tough rules to keep multinational corporations from striking the offshore tax deals known as inversions, and that the highest earners and profitable law firms and hedge funds should bear much of the burden in a tax overhaul. Republicans, on the other hand, generally want to shield much of the income that corporations make offshore from U.S. taxation.
And that doesn’t even get into perhaps an even bigger problem – many of the most expensive tax breaks are also quite popular, and the others have high-paid defenders in Washington.
The most expensive tax breaks – like for home mortgage interest and charitable contributions – are generally on the individual side, and Camp sparked criticism by daring to modify them.
On the business side, both Camp and Obama, for instance, have proposed scaling back provisions that allow businesses to write off investments in equipment more quickly than those items will depreciate. But both the business community and many Republicans are skeptical of that idea, saying it will keep businesses from expanding.
“Dynamic” scoring: Republicans moved this week to implement budget rules that project that tax cuts can at least help to pay for themselves, by spurring more economic growth.
Republicans say those rules, known as “dynamic” scoring are more accurate, but they would also undoubtedly make the math at least a bit easier for tax reform. Democrats quickly shot back that the rules were the GOP’s latest effort to tilt the scales toward the wealthy, and away from the middle- and working-class.
Inter-party divisions: It’s not just Republicans who believe that any tax reform has to tackle the individual system. In a break from the White House, top Democratic tax aides on Capitol Hill have said it would be difficult to leave out of any tax overhaul those individuals who feel the economic recovery skipped them over.
Obama and congressional Democrats also had their share of divisions in the recent debate over extending lapsed tax breaks.
Meanwhile, many of the loudest critics of Camp’s tax reform draft were actually Republicans, most notably those close to the banking industry, which was far from pleased with a tax on the largest financial institutions.
The divide over tax reform goes both across and within party lines.