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Is there hope for true tax reform? And what would tax reform look like? It would take the President, a Republican Party leader and a Democratic Party leader working together to pass legislation. It would enact a simplified rate system for individuals and a simplified tax code that broadens the tax base and closes loopholes and special interest tax shelters. But is that really possible? Veterans of the tax accounting profession can remember the Tax Reform Act of 1986. President Reagan along with House Ways and Means Committee Chairman Dan Rostenkowski (D-IL) and Senate Finance Committee Chair Bob Packwood (R-OR) worked to get bipartisan support for the 1986 Act. The Act was highly debated and a controversial topic back then. It was a significant victory for the power of political compromise with both parties giving concessions to get the Act passed. The Act passed by a vote of 292-136 in the House and by a vote of 74-23 in the Senate.

The result was a tax code with fewer tax loopholes and a simplified rate structure (15% and 28%). The Act did leave in popular provisions such as the deduction for mortgage interest, charitable contributions, and deductions for state and local taxes. For some tax reform purists, these deductions are not economically sound but are either too popular with the general public or too politically sensitive to consider cutting. The Act also raised corporate and capital gain tax rates. The problem is that while the Act changed the tax code, it did not change the system by which our tax laws are enacted. By 1993, the top individual tax rate was back to 39.6% spread among 5 tax brackets. Since 1986, there have been an estimated 15,000 changes to the tax code. The tax code now is more complex than it has ever been and contains many or more of the special interest provisions that the 1986 Act tried to remove.

So where do we stand today? We have a House Ways and Means Committee Chair, Dave Camp (R- MI) and a Senate Finance Committee Chair, Max Baucus (D- MT) that have said their goal is to introduce tax reform that will eliminate tax loopholes and lower rates. Rep. Camp’s proposal is to reduce the corporate rate from 35% to 25% and to reduce the individual rates to 10% and 25%. We have a second term President that does not appear to support tax reform as President Reagan did. Congress does not seem as inclined to compromise as it did back then. While all the parties involved agree that reform is necessary and would help promote economic growth, none can agree on a path to get there. Some of the obstacles to significant reform are built into the system. Tax bills must be revenue neutral. That means that spending cuts cannot be used to offset reductions in tax rates. Also corporate tax loopholes must be eliminated to pay for corporate rate reductions and individual tax loopholes must be eliminated to pay for individual rate reductions. On a positive note, Speaker of the House John Boehner has reserved the initial House bill designation HR 1 for the tax reform bill. That is an indication that tax reform is going to be a priority in the next legislative session. The 1986 Tax Act took a good two years to assemble and pass. Although Rep. Camp and Sen. Baucus have been diligent in working on their tax reform bill, getting together a proposal that is acceptable to both parties in this legislative session is going to be a long shot.

For more information on this topic, please contact your local UHY LLP professional.