Is Meaningful Tax Reform Coming?

It has been 29 years since the last major rewrite of the Internal Revenue Code.  That effort in 1986 was preceded by one in 1954, a 32-year interval.  If we are to see another one, it could happen in 2017 or 2018, interestingly also nearly an identical interval. A number of variables must align, however, or we will simply continue with the current patchwork of last minute, year-end changes that drive both taxpayers and practitioners crazy.

Why is This So Hard?

Complications always arise due to the politics of the moment and the outsized influence of lobbyists in today’s debate. Also, a huge change since 1986 is the full manifestation of the 24-hour news cycle and cable news outlets on both ends of the political spectrum, as well as the rise of various online and social media programs. Now, anyone with an opinion has an outlet and can draw a following.

Politicians primarily want to be elected or re-elected, and they need money to run in the ever-increasingly expensive process. Add in the hyper-partisanship of today’s Congress caused by the previously mentioned media effect and aggressive gerrymandering by both parties, and you have a current congressional make-up where the Democrats are generally as liberal as they have ever been, and the Republicans are as conservative as they have ever been.

That makes it hard to meet in the middle. And, of course, when talking about tax reform, if one group’s taxes are going to be cut, then another group’s are likely to be increased. As one famous congressional leader once said, his definition of tax reform was, “Don’t tax you, and don’t tax me; tax the fella behind the tree!”

OK, What Could be Different Politically in 2017 or 2018?

Well, the first thing is the 2016 elections. For better or for worse, President Obama has had difficulty forging strong relationships with Congress – certainly with the Republicans, but even at times with his fellow Democrats. A new president brings a clean slate and a fresh perspective, along with some sort of mandate.

Also, while the Republicans have a virtual lock on the House of Representatives, next year’s Senate elections could easily swing that body back to Democratic control in 2017. Much will remain uncertain until next November, but the most likely combinations would yield a federal government not fully controlled by either party, as today, with some different players.

And Tax Reform?

No one denies that changes to the tax system are needed. Bipartisan working groups in the Senate have been meeting to identify both the biggest issues and the potential solutions. At the top of the list are the solvency of Social Security and Medicare. Funded by payroll taxes, both are going broke, and every year that the problem is ignored, it only gets worse. Another major concern is U.S. taxation of multinational corporations. Currently, we have the highest corporate income tax rates in the developed world, with significant barriers to U.S. companies wanting to repatriate funds back to this country on a tax-efficient basis. This is anti-competitive in an increasingly global economy. A third mega issue is the broad concept of tax fairness and who is, or is not, paying their “fair share.” And finally, tax simplification is a constant theme. The current tax code has over 4,000 pages of small print, and that doesn’t even touch the regulations, court rulings, IRS pronouncements, and other significant details.

So, Will It Happen?

It just might. A lot of the things I have mentioned here are eerily similar to the discussion in the early 1980s that resulted in the landmark Tax Reform Act of 1986. Nothing is certain, but that 32-year itch just might get scratched!

Stay tuned, and in a follow-up blog this fall, I’ll discuss possible ideas for specifics in a comprehensive tax reform plan.