Forged in Battle: Tax-Reform Surprise

Published in Barron's

The very last thing anyone expects from our gridlocked Congress is a sweeping tax-reform law. Yet, such a deal could emerge as this year’s biggest surprise, fostered by a debt-ceiling crisis come October. Investors beware: A reform that broadens the tax base and lowers marginal income rates is likely to call for higher rates on capital gains and dividends, according to Mark Bloomfield, president and CEO of the American Council on Capital Formation. Bloomfield’s mission for 37 years has been to convince policy makers that high taxes on investors is bad economic policy, so his ear always is on the rail in regards to this issue.

A tax-reform measure is expected to be passed along party lines by the House Ways and Means Committee in September. Conventional wisdom says it will go no further. The Senate Finance Committee will introduce its own version of tax reform in October. Because of Democratic opposition—most notably from Senate Democratic leader Harry Reid—it’s doubtful that this proposal will even clear the committee. Nevertheless, a Ways and Means bill would be a significant event, the first major congressional tax-reform proposal in 30 years. Bloomfield says the bill also will be a wake-up call for investors as to possible changes to come, since Ways and Means Committee Chairman Dave Camp, a Michigan Republican, has been consulting all along with Senate Finance Committee Chairman Max Baucus, a Montana Democrat. And it could become more than a wake-up call if the fighting becomes intense enough to cause a government shutdown. In that scenario, Congress would have to cobble together an emergency proposal—including tax reform. So be prepared for the unexpected, urges Bloomfield.

– Jim McTague