The Super Committee's Tax Reform Challenges

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The Super Committee – more formally known as the Joint Select Committee on Deficit Reduction – is expected to announce soon that its members were unable to reach an agreement, according to several reports, including this one from CNN. If committee members are unable to reach consensus today – this the deadline to bring a plan to the CBO for its analysis – some $1.2 trillion in spending reductions will kick in, beginning in January 2013.

While it's still possible (as of mid-morning Monday, November 21, 2011) that failure may be averted, the Super Committee had a number of obstacles to overcome from the start. A significant one was the accelerated schedule under which the Committee worked, says Marc Gerson, partner with the law firm of Miller & Chevalier, and an expert on federal tax policy. "Tax reform is a long, complicated process," he says. "Doing tax reform in an accelerated time period is exceptionally difficult."

In fact, the Super Committee had just months to try to come up with changes. While it would have been difficult for the Committee to truly reform the tax code in the time it had, many observers thought it would be possible for them to develop a proposal that included "directional language," Gerson says. In other words, while the Committee's report may not have gotten into the nitty-gritty details of the tax code changes that were needed, it could have identified targeted tax rates for businesses and individuals, he adds.

Then too, any proposal that made its way out of the Committee would have to to be truly bi-partisan, Gerson says. With six members from both the Republican and Democratic parties, it was unlikely that the final vote would be a seven-to-five split, Gerson adds. "It wasn't a question of swaying one Democrat or one Republican," he says.

Another challenge was determining whether any changes to the tax code would be made with an eye on reducing the deficit, or if the changes would focus exclusively on simplifying the code and making it more competitive. If the latter were the only goal and the changes were revenue-neutral, no money would be available to close the deficit, Gerson points out. "If you use tax revenue to reduce the deficit, it's difficult to get rates are low as they could go," he says.

At the same time, the deficit remains a serious concern. If it's not addressed, at least to some extent, through tax revenue, the spending cuts required to close it may be severe.

On top of these concerns is the political environment. Next year, the president and many members of Congress are up for reelection. Neither party wants to be seen as giving in to the other side.

Although it's possible a deal may yet develop, the markets already have reacted to the probable failure of the Committee, Bloomberg reports. As of mid-morning, stocks had dropped 2.4 percent.

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Karen Kroll supplies the Business Finance community with reporting and commentary examining cash management and treasury-related topics.

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