Tax reform in this election year: It's not likely

By Tom Raum

Associated Press

Published: Monday, Feb. 6 2012 11:36 a.m. MST

Obama has proposed ending tax breaks for U.S. companies moving jobs or profits to foreign countries. He also would create a minimum tax on their overseas earnings. And he has suggested new tax breaks for businesses that move jobs back to the U.S., for domestic manufacturing and for companies that invest in towns that have suffered major job losses. But getting most attention is his plan to tax personal incomes above $1 million — including investment income — at a rate of at least 30 percent.

"Washington should stop subsidizing millionaires," Obama said in his State of the Union address. "Send me these tax reforms, and I'll sign them right away."

Obama also wants to see corporate taxes lowered but hasn't said by how much. The White House has signaled he'll unveil details on Feb. 13 when he submits his budget for the fiscal year that begins Sept. 1.

The nominal corporate tax rate is 35 percent, the highest in the world after Japan. However, few companies pay that much after taking various deductions. Because of recent special deductions in the government's stimulus programs, including the ability to write off the full cost of purchases of new equipment, corporations last year paid just over 12 percent on average. That is expected to rise to about 26 percent this year, according to Congressional Budget Office calculations.

Romney would make permanent most Bush-era tax cuts and would eliminate taxes on interest, dividends and capital gains for those earning under $200,000. He would lower the corporate tax rate to 25 percent.

Jobs and tax reform have been leading issues in the GOP primaries so far. Most Americans believe that the tax system is unfair and would like to see it changed, recent polls suggest. The polls show a majority believe upper-income Americans pay less than their fair share, although far more Democrats believe this than Republicans. There is also a big political divide over whether to keep the current system of taxing investment income — such as dividends and capital gains — at lower rates than wages. Far fewer Democrats than Republicans want to keep things the way they are, polls show.

Romney, one of the richest presidential candidates ever, recently disclosed that he paid federal taxes at an effective rate of around 15 percent because most of his income came from investments that are taxed at that rate, compared to a top rate of 35 percent for wages. That disclosure has helped fuel the recent surge of interest in tax reform.

Gingrich would let people choose whether to file under the current system or pay a 15 percent "flat" tax while preserving the mortgage interest and charitable deductions. He would eliminate the capital gains and estate taxes and would cut the corporate tax rate to 12.5 percent.

Former Sen. Rick Santorum, R-Pa., would reduce the number of tax brackets to two — 10 percent and 28 percent, exempt domestic manufacturers from the corporate tax and halve the top rate for other businesses. He would triple the personal exemption for dependent children.

Rep. Ron Paul, R-Texas, would eliminate the federal income tax altogether. Also the Internal Revenue Service. He would vote for a national sales tax, and he supports certain excise taxes and certain tariffs.

The nonpartisan Tax Policy Center has said that the wealthy would be the biggest beneficiaries of the Romney, Gingrich and Santorum tax plans. The center did not evaluate Paul's plan

The Tax Reform Act of 1986 backed by Reagan and O'Neill reduced the number of tax brackets and lowered the top marginal tax rate to 28 percent from 50 percent (it's now 35 percent).

The reduction in individual taxes was in large part paid for by repeal of the investment tax credit, which effectively raised corporate tax payments to the Treasury by 25 percent, or about $100 billion a year in today's terms.

But the political climate was far difference in 1986. Reagan was a popular second-term president with a good working relationship with Congress. The deficit was under control and the economy was growing, not limping like now.

Economist Bruce Bartlett, author of "The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take," is not optimistic for major tax reform no matter who wins the election.

"I think the most we can hope for is a modest improvement to fix some glaring problems in the code," he said.

As to those calling for starting from scratch with a whole new tax system such as the so-called fair tax or flat tax, "I don't believe that's going to happen," Bartlett said. "I think that's just a political non-starter."

Follow Tom Raum on Twitter at http://twitter.com/tomraum

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