Will True Tax Reform Happen in Our Lifetime?

Will explorers ever truly discover the Fountain of Youth? Will the Cubs ever win the World Series? Will Elvis ever be found alive? There are so many questions that might not ever be answered in our lifetime. Here’s another one: will we ever see true tax reform in Washington? It doesn’t matter which side of these great questions you believe, the fact is, they all seem impossible to answer.

Round and Round They Go
Tax reform is, always has been, and always will be a hot-button issue in our country, among lawmakers and general taxpayers alike. Although everyone apparently wants to reach the same goal, which is a better, more balanced tax system, no one on Capitol Hill seems to agree on how to reach that standard.

Will a Settlement Ever Be Reached?
It’s hard to imagine republicans and democrats coming to terms on real tax reform when hey have yet to come to terms regarding the 55 expired tax laws that have been sitting in limbo since January 1. Although both parties agree that decisions need to be made, they can’t get it done. Although reports this week indicated that a vote and a resolution could be in the works soon, until both parties can agree on several key issues, the tax extenders will be left dangling.

Democrats Like Taxes
With that as a backdrop, how can anyone expect the Nation’s lawmakers too overcome their differences and hammer out real reform? Democrats continue to push for higher taxes on the wealthy, as well as for more taxes for corporate America. In fact, it was just a couple of years ago that democratic leaders were able to raise the top individual tax rate from an already high 35 percent to a staggering 39.6 percent. They weren’t done there. Among other increases, democratic lawmakers also raised the maximum rate for dividends and long-term capital gains from 15 percent to 20 percent. That is all in the name of forcing the wealthy to pay their “fair share.”

Republicans Want Less
Meanwhile, republicans want real reform because the current system unfairly targets the wealthy. GOP lawmakers want the maximum individual tax rate cut back to 25 percent. To make up for the loss of revenue, republicans propose removing many of the existing exclusions and deductions from the current tax code. Obviously, these plans don’t have much in common, and the battle over individual tax reform will no doubt continue. In fact, no real reform is likely to take place before 2017 when we will have a new president. Even then, reform is no guarantee.

One Bright Spot
On the other hand, there is one area that both parties do agree on: that is that the corporate tax system needs an overhaul. Right now, U.S. corporations pay a top rate of 35 percent, which is more than any other industrialized nation in the world. Both parties have submitted new tax plans for corporations, which do have some common ground. That means there may be some hope in the corporate sector.

Good News Bad News
However, although corporate tax reform is needed, without making simultaneous changes in individual tax rates, there could be problems for companies who want to switch from operating as C corporations back to S corporations if a republican wins the next presidential election and the individual tax rate is reduced. The reason for that is because unlike switching from an S corporation to a C corporation, converting from a C corporation to an S corporation is not tax-free and it’s a lot more complicated.

Question Remains
So, while it’s a good sign that both parties want to change the current corporate tax system, without changing the individual tax system at the same time, there could be bigger headaches for corporations down the road. Thus, the need for real tax reform will continue and so will the question as to whether or not it will ever happen in our lifetime.