With only 10 congressional working days left, Senate Finance Chairman Max Baucus (D-MT) and House Ways & Means Chairman Dave Camp (R-MI) are keeping a fevered pace to follow through on tax reform. They both know it’s not going to happen in 2013 but are preparing for 2014.
This week Senator Baucus is releasing tax reform drafts on international taxation, tax administration and capital cost recovery. Tax reform proposals specifically affecting the investor will eventually follow. Congressman Camp said his tax reform plan will be out next month or in January. While he hasn’t shown any of his cards yet, Camp said his draft plan would be “revenue and distributionally neutral.”
Is tax reform possible in 2014 during mid-term elections? Absolutely. Remember the 1986 Tax Reform Act also succeeded during bitter partisan times and in the heat of the campaign season.
With individual tax reform proposals likely to be announced as soon as the end of this month, the investor faces three headwinds. First, today’s tax reform proposals are based on an income tax model which rightfully reduces marginal tax rates but wrongly does so by penalizing saving and investment, including the tax treatment of capital gains. Second, the “Simpson-Bowles” plan, the Congressional Budget Office’s new report, “Options for Reducing the Deficit,” and, very importantly, the Tax Reform Act of 1986— the model for today’s tax reform discussions—propose increases in capital gains taxes. Third, today’s populist environment cries out for higher taxes on the wealthy with a bull’s eye on capital gains and other provisions important to the investor. Finally, businesses may be willing to play along with higher rates on saving and investment provisions as long as their own respective pet provisions are protected. If we go down this road, we will see a repeat of what happened in 1986 as documented in the historical book Showdown at Gucci Gulch.
For more than three decades the ACCF has said that tax reform should not only be about tax rates, but also the tax base. Switching from our current income tax to a consumption-based tax system would increase saving, investment and economic growth, provide a simpler tax regime and fairer tax system because concerns about progressivity could be addressed. See ACCF report here. Under this system, capital gains and other investor provisions would not be penalized.
The battle is just beginning and the ACCF will be on the front lines, just as we were in 1978, 1981 and 1986.