Tax Reform Bumps Into More Political Reality

If Congress is going to reform the tax code, it will take an enormous amount of hard work and a lot of luck. The stars, as they say, will have to align. Unfortunately, those galactic bodies seem to be getting more and more disarranged.

Reform just can’t catch a break. The deficit is shrinking, taking away one possible driver of a rewrite. The Congressional Budget Office now projects the nation won’t bump up against its debt limit until October or even November, taking even more steam out of any Grand Bargain—or even a not-so-grand deal.  And pols seem unable to disentangle themselves from distracting sideshows such as the IRS tea party flap.

Some have argued that these events make reform easier, not harder. The IRS scandal, they say, will encourage bipartisan compromise. Without immediate deficit pressures, Democrats would be more willing to accept a deal that raises the same amount of money as the current code and not insist on a reform that raises revenue.

I don’t think so.

Yesterday, House Ways & Means Committee Chairman Dave Camp (R-MI) gave an important update on tax reform to a group of Washington tax wonks. Yet his talk got almost no attention. The headlines came from what he said to reporters after the event. The Hill’s was typical: “Ways and Means Chairman: IRS targeting of Tea Party groups didn’t start in Ohio.”

Tax reform? What tax reform?

Camp is trapped. He has to keep talking about the IRS kerfuffle because reporters keep asking and because, as a Republican, his own caucus wants him to. But I suspect he’s well aware of how the issue is sucking the life out of his reform agenda.

Even if few noticed, Camp’s talk was pretty interesting, as much for what it didn’t say as for what it did.

All of his focus was on simplification—straight from the spring cleaning hymnal that he and Senate Finance Committee Chairman Max Baucus (D-MT) have been singing from lately. Not a word in Camp’s remarks about the benefits of low rates. Just simplification for its own sake.

Nothing wrong with that, of course. And in today’s political environment a simplification bill would be a real achievement. But it won’t be major base-broadening, rate cutting tax reform.

Camp gave a couple of examples:  the complexity of international tax and the 15 different subsidies for higher education.

He might be able to work something out on education. International taxation will be much harder. And any housecleaning that upsets the status quo will always be a challenge.

Camp, for example, has incurred the ire of Wall Street for proposing to simplify the tax treatment of some investment vehicles. This generated a story in the New York Post headlined  “The Most Feared Man on Wall Street.”

Wall Street lobbyists say they object to Camp’s proposal to change the tax treatment of some options, such as covered calls. This, they say, will hurt ordinary investors. But ordinary investors don’t play the options market. And the pros really are worried about having to mark-to-market their own derivatives positions, as my Tax Policy Center colleague Steve Rosenthal described earlier this year.

The Street will put on a full-court press to kill this idea. And if history is a guide, it will succeed.

If Camp and Baucus are going to get even simplification-type reform this year, they will need to catch a break or two. And so far, at least, they’ve gone cold.