Not Another No-Go Tax Reform Effort

Sigh. Here we go again.

The administration is putting together a task force to study options for tax reform and report back to the president by Dec. 4. After that, who knows.

Even the optimists among us would be forgiven for thinking this is all a pointless exercise. After all, it was just a little over four years ago that President George W. Bush announced the formation of his own commission to offer recommendations for making the tax system fairer and simpler without reducing revenue. At the outset Bush said he could support a flat tax and would even consider a consumption tax. The commission was supposed to report by July 2005. The deadline was pushed back twice. The group finally submitted its report in October of that year. And then -- nothing.

Will anything be different this time around? Actually, chances are, yes. For one, a major tax bill next year is virtually assured. Obama should have this date marked in red on his calendar: Dec. 31, 2010. After that date, the Bush tax cuts -- including the 35% top marginal income tax rate, the 15% top rate on capital gains and dividends, and a host of other breaks -- are supposed to be history. The current plan is to let the cuts for the top rates expire, but keep them for middle- and lower-income taxpayers. That will take legislation, so why not a big overhaul bill that gives the system a badly needed shakeout? If we've learned nothing else from watching Obama these last few weeks, we know he's willing to think big and propose big.

But not too big. That gets to another reason why there's a decent chance for a tax reform bill to pass: The type of "reform" being contemplated will be more doable and less revolutionary than many past attempts that fizzled. Usually, any tax reform effort starts with buzz about overthrowing the current code with something much more simple (but usually a lot more regressive) such as a flat tax or a consumption tax.
 
Obama's commission won't even try for something that radical. Don't expect anything on the scale of  the Tax Reform Act of 1986, by far the biggest overhaul we'd seen in decades. That law reduced the number of tax rates, broadened the tax base, got rid of a lot of deductions (remember the write-off for car loans?) and brought true reform in other areas of the code that had gotten out of hand. But Congress has added one break, tweak and loophole after another since then and the tax code is nearly as Byzantine as ever.

While this time there will be some stabs at simplification -- combining the crazy quilt of various education tax breaks into one simplified credit, for example -- the focus of reform will be different. Expect efforts to close tax loopholes, which means new tax regulations for businesses; keep taxes low for folks at the bottom end of the income scale, and for middle-incomers too; and raising taxes for those in the upper brackets. Big changes? Definitely. An appreciably smaller tax code? Don't bet on it.