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Obama weighing broad overhaul of the tax code

By Jackie Calmes

New York Times


WASHINGTON » President Barack Obama is considering whether to push early next year for an overhaul of the income tax code to lower rates and raise revenues in what would be his first major effort to begin addressing the long-term growth of the national debt. While administration officials caution that no decisions have been made and that any debate in Congress could take years, Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said.

The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates -- much like a bipartisan majority on Obama's fiscal commission recommended last week in its final blueprint for reducing the debt through 2020.

Doing so would not only be an opportunity to begin confronting the growth in the national debt but also a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness.

Obama signaled his inclination in off-the-cuff remarks Wednesday as he was defending the tax cuts deal negotiated with congressional Republicans this week. "We've got to have tax reform," he said.

Economic and political advisers say the process is in its early stages, and Obama ultimately could decide against such action given the pitfalls politically and substantively. Any effort to alter the tax code provokes powerful opposition among interest groups, and the picking of winners and losers.

Yet proponents within the administration and among some outside advisers say that Obama, by putting tax-reform atop the national agenda, could seize an opportunity to take the offensive in dealing with the newly empowered Republicans in Congress, repair his strained relations with business and embrace a potentially powerful theme heading into his reelection campaign.

Democrats have long struggled to define battles over taxes on their terms, and the revolt by many members of the president's party in Congress over his deal with Republicans to extend the Bush-era tax cuts has underscored anew the deep ideological divisions in Washington on the subject. Should that deal be enacted, however, it could create added pressure for an effort to simplify the tax system, because its mix of components, benefitting workers across the income spectrum, would further complicate the tax code, at least for the next year or two.

Administration officials and lawmakers in both parties also took note last week when the bipartisan show of support within the fiscal commission for changes of the type being considered by Obama suggested a potential break in the long-solid Republican wall of opposition to anything that smacked of a tax increase.

Rather than increase individual and corporate tax rates to raise more revenues, a majority of the panel proposed to eliminate or reduce many of the popular tax breaks for businesses and individuals that cost $1 trillion annually and to use the additional revenues both to lower rates and to reduce deficits. The majority included five Republicans, including two of the Senate's most conservative members, Tom Coburn of Oklahoma and Michael D. Crapo of Idaho.

According to commission officials, Obama's Treasury secretary, Timothy F. Geithner, expressed interest in the panel's approach. By ending or restricting tax breaks in return for lower rates, businesses and individual taxpayers would know that for each credit or deduction that they wanted put back into the code, their marginal tax rates would go up by an amount sufficient to make up the revenues that would be lost.

Some Democrats argue that the White House should take the lead, before Republicans do. Even as administration officials deliberate over their course, a growing number of conservative economists and strategists are urging congressional Republicans to quit fighting the decade-old fight over the Bush-era tax rates and take up the reform mantle.

"Declare Bush tax cuts, like the Bush administration itself, over," Kevin A. Hassett, the director of economic policy studies at the American Enterprise Institute, a conservative-leaning research organization, wrote recently in a Bloomberg News column. "The fact is," he added, "if we extend the Bush tax cuts, it locks in the status quo. Earth to Washington: The status quo stinks. With the economy still limping forward, much more significant fiscal-policy medicine is in order."

Obama, in his brief remarks Wednesday during a meeting with the president of Poland, suggested that Republicans for the next two years will still be defending the Bush tax rates while he is looking forward to a new, better code.

"We're going to have a big debate about taxes and we're going to have a big debate about the budget and we're going to have a big debate about deficits," he said. "And Republicans are going to have to explain to the American people over the next two years how making those tax cuts for the high end permanent squares with their stated desire to start reducing deficits and debt."

"I'll have the opportunity," he added, "to make the case that we've got to have tax reform, that we've got to simplify the system, that we do have to cut spending where it makes sense. But we're also going to have to make sure that we've got a tax code that is fair and that looks after the interest of middle-class Americans and continues to grow the economy."

Next year will be the 25th anniversary of the previous overhaul of the income tax code that lowered rates and wiped away many tax breaks in return. As administration officials point out -- by way of lowering expectations for action soon -- the process leading to the 1986 act was launched nearly three years earlier, when President Ronald Reagan called for a fairer, simpler code in his 1984 State of the Union address. And the legislation several times seemed dead.

The earlier effort also involved a president of one party facing a Congress partly controlled by the opposition party.

While the overhaul of a quarter century ago raised taxes for many corporations, the legislation was designed to be "deficit neutral" -- it neither increased nor reduced the government's tax collection overall. But people in both parties agree that the next tax-overhaul effort would almost certainly have to raise revenues to address the nation's growing fiscal problems.

"I think it is important to understand that that is not a process that will happen overnight," Robert Gibbs, the White House press secretary, said Thursday. "That will take -- as it did I think in the last major tax code revision in the mid '80s -- that will take some time." But, he added, Obama and his economic team "certainly believe that it's good to start that long process."

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