Negotiations over a resolution to the fiscal cliff met an impasse in the past week. Republicans, mainly from states with low state and local taxes, would prefer to cap tax deductions for higher income taxpayers than raise the top marginal tax rate. Democrats are strongest in those states with high state and local taxes; the higher income taxpayers in those states would really feel the tax bite if deductions for these taxes were capped at the federal level. Both parties have become proxies for upper income earners yet neither will admit it because it doesn’t play well in middle America. Democrats profess that their sole concern is the middle class; Republicans cite their allegiance to small business owners as the reason for their resistance to higher tax rates.
On the spending side, Democrats have not put forward any specific modifications to entitlement programs like Social Security, Medicare, Medicaid that they would consider – only that they would consider them. Mostly they talk about preserving these programs even though no one has suggested getting rid of them. Most of us sit in the back of this bus with a sinking feeling in our guts; we see posturing and positioning from the Congress and the President in the front seats but the bus is not moving.
Some voices are calling for comprehensive tax reform as a final solution; others rightly scoff at the idea that a lame duck Congress can enact even a small bit of tax reform. The task of tax reform is monumental – almost Sisyphean. I have been reading a book about the last comprehensive tax reform that took place in 1986, “Showdown at Gucci Gulch”, by Jeffrey Birnbaum and Alan Murray. The authors tell a detailed and well informed narrative of the dastardly dueling and dealing that occurs in any democracy when competing interests collide and collude in crafting a compromise.
Venture investors want low capital gains rates. Companies whose revenues and profit depend on investments in equipment and materials want to protect tax breaks for their costs. Unions want fringe benefits for their members to remain tax free. Oil and gas companies want to shield their oil depletion allowances that permit them to exclude some of the taxable income they earn each year. Insurance companies lobby to retain the tax free status of the cash build up on the life insurance policies they sell. Realtors and home builders want to preserve the mortgage interest deduction; the Tax Policy Center reports that over 50% of the total of this deduction goes to the top 1/10th of 1% of income earners. Charitable organizations and places of worship lobby for the preservation of the charitable deduction.
70% of taxpayers do not itemize and the vast majority of taxpayers who do itemize claim about $10 – $15K. The top 1% of taxpayers claim on average about $120K in deductions.
Voters want results; the say they want compromise and some resolution to the political standoff that has been the status quo in Washington for the past two years. Given the issues, interests and costs involved, finding a middle ground will be difficult. The 1986 Tax Reform law was almost two years in the making, and soon after it was passed, Congress began to tinker with it.
535 elves, the members of Congress, tinker away in the workshop of the Federal Government, making thousands of tax toys for the citizens and businesses of this country; everyone wants a toy, not a lump of coal. It is unlikely that Congress can put together a comprehensive tax package before January 1st.