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Experts: Temporarily Extend Tax Cuts With 2013 Tax Reform Guarantee

By Heather M. Rothman
Publication Date: 06/20/2012

Lawmakers must find a way to avoid the fiscal cliff set to hit the economy Dec. 31, even if that means temporarily extending all of the expiring Bush-era tax cuts and addressing the revenue situation as part of tax reform in 2013, bipartisan budget experts told the Senate Finance Committee June 19.

Without congressional action, at the end of 2012 the reduced tax rates are set to expire, while on Jan. 1, $1.2 trillion in spending cuts are set to begin. The situation has been labeled a “fiscal cliff” by lawmakers and analysts but Alice Rivlin, the former Congressional Budget Office director and head of the Office of Management and Budget in the Clinton administration, described it as “more of a wall than a cliff.”

If Congress allows these major changes on the tax and spending sides of the ledger, “automatically you will endanger the recovery,” said Rivlin.

Senate Finance Committee Chairman Max Baucus (D-Mont.) agreed, saying the nation needs a “comprehensive debt reduction plan that does not shock the system with deep, immediate cuts” and that addresses both spending and revenues.

“It's true that the cliff doesn't hit all at once but the image of an America that can't even avoid this quite cataclysmic set of self-imposed problems … would be an admission that our government isn't working,” Rivlin said. “That would have serious repercussions in the markets as some have pointed out.”

Call to Extend Tax Cuts Temporarily

Rivlin and former Sen. Pete Domenici (R-N.M.), co-chairs of the Bipartisan Policy Center's Debt Reduction Task Force, urged lawmakers to temporarily extend the Bush-era tax cuts but include language with it forcing fundamental tax reform.

Given the congressional calendar and the many major challenges lawmakers face, the post-election lame-duck session is just not long enough to address tax reform, Rivlin and Domenici said.

“The lame duck is too big to get it done,” Rivlin said. “You could lay the groundwork though for the next Congress. I think you have to postpone the tax increases but with a requirement to fold it into tax reform in the next session.”

Baucus said he did not want to send the message that Congress is “kicking the can down the road” on the tax cuts and tax reform, and asked what the process would look like.

Domenici said the BPC is currently working on the process but that it might need to occur as part of a continuing resolution prior to the Sept. 30 end of the fiscal year. Domenici said he hopes to offer a plan before then.

“The basic point is we're not in favor of just extending the tax cuts,” Rivlin said. “You've got to embed it in some sort of process that forces you to come to grips with the real problem.”

Republicans support extending the tax cuts for all taxpayers, while President Obama has included language in his budget proposals seeking to extend them only for taxpayers earning less than $250,000.

Rivlin Says Scrap the Current Code

Rivlin also urged lawmakers to scrap the current Internal Revenue Code and start over by assuming that all income is taxable and then figure out which modifications and tax expenditures are absolutely essential, even though they would raise the rate.

Rivlin said she and Domenici believe the “radical approach” will help simplify the tax code and contribute to deficit reduction. The two budget experts offered a modified version of their deficit reduction plan, originally offered in November 2010.

The complete text of this article can be found in the BNA Daily Tax Report, June 20, 2012. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2012, The Bureau of National Affairs, Inc.