For instance, many economists agree that though popular, the mortgage interest deduction does little to encourage homeownership, while the health insurance exclusion pushes up health insurance costs. Democratic-leaning economists and politicians also complain that tax breaks tend to favor the wealthy, while Republicans say that some are especially justified — for example, low rates for investment activities.
In his meetings with lawmakers this week, Obama spoke in favor of tax reform as an engine for fresh revenue, but he and other Democrats have been less interested in helping Republicans achieve their primary goal — lower tax rates. Especially in the wake of the “fiscal cliff” deal that raised the top rate from 35 percent to 39.6 percent, many Democrats are more inclined to pocket the extra money than to embark on a difficult and politically perilous tax rewrite.
Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways and Means Committee Chairman Dave Camp (R-Mich.) are nonetheless forging ahead with bipartisan discussions. But the success of their efforts depends heavily on the outcome of negotiations over a broader deficit-reduction deal that resolves the question of whether tax reform raises cash or lowers rates.
Those negotiations are likely to take months, but leaders of both parties see the adoption this week of competing budget resolutions in the House and Senate as a first step. The House Budget Committee approved a plan late Wednesday on a party-line vote to balance the budget over the next decade entirely through spending cuts, and it will be debated on the House floor next week.
The blueprint, drafted by House Budget Committee Chairman Paul Ryan (R-Wisc.) with Camp’s help, calls for “revenue neutral” tax reform that lowers the top rate from 39.6 percent to 25 percent — a goal Democrats say cannot be met without shifting more of the tax burden onto the middle class.
The Senate Budget Committee was set to approve its own partisan budget late Thursday that seeks to replace automatic spending cuts known as the sequester with $1.8 trillion in alternate policies, including nearly $1 trillion in new taxes over the next decade.
The Senate Democratic blueprint orders the Senate Finance Committee to raise the cash through tax reform by Oct. 1 — a mandate that Republicans say would make a bipartisan tax reform bill impossible. The full Senate is also expected to take up its budget next week.
Assuming both chambers adopt their resolutions, party leaders are expected to appoint a conference committee — headed by House Budget Committee Chairman Paul Ryan (R-Wisc.) and Senate Budget Committee Chairman Patty Murray (D-Wash.) — that could become the primary forum for continuing discussions over a big deal.