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Tuesday, November 13, 2012

Foster: What to Expect from the Tax Reform Debate

Huffington Post op-ed:  What to Expect When You're Expecting Tax Reform, by William E. Foster (Washburn):

Despite the rhetoric from both sides of the aisle about changing tax rates, history tells us that dramatic change is unlikely. Within hours of the conclusion of the 2012 election, partisan leaders began drawing lines in the sand with respect to tax policy, and tax rates in particular. ...

History tells us that significant changes to tax rates are unlikely when there is divided partisan control of the federal government. A perusal of the historical tax rate tables found on the Tax Foundation's website reveals several trends with respect to partisanship and tax rates. Initially, large rate swings from one year to the next are extraordinarily rare and almost always tied to significant political movements or national crises. Second, total political party control matters, as tax rate increases or decreases have historically been accomplished when one party controls the House, the Senate, and the Oval Office. Third, political rate maneuvers are most often implemented in the upper middle class and higher income ranges, whose rates are adjusted relatively frequently. ...

For now the Republicans may have an advantage if the historical trends continue. Although Democrats will continue to occupy the Oval Office and majority control of the Senate, the House is where revenue bills must originate, and power in that legislative body has been nearly essential to accomplishing tax rate changes. Those on either side of the aisle fearing dramatic rate change should take comfort in the fact that such shifts seldom happen from one year to the next. There has been only one double-digit increase (11 percentage points in 1941) in the top marginal tax rate on taxable incomes of $100,000. In the same vein, those hoping for dramatic tax rate adjustments will likely be disappointed. For all of the hype that tax policy generates in the partisan political discussion, very little change manifests in the form of significant rate change. With split partisan control of the federal government for at least another two years, there is no reason to believe major tax rate reform is coming.

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