Dems press Obama to reform tax code

Senate Democrats have found a new avenue for breaking the current gridlock on taxes: the White House.

Sen. Ron Wyden (Ore.), the top Democrat on the Finance Committee, released a paper Tuesday that urged the Treasury Department to shut down popular tax avoidance strategies involving a host of complex financial tools.

The call came a day after Sen. Bernie Sanders (I-Vt.) made the case that, since Congress hasn’t acted, the Obama administration should crack down on tax breaks used by corporations and the wealthy.

{mosads}The new push from Senate Democrats comes as Obama’s use of executive power is at the center of a congressional fight that almost led to a partial shutdown of the Homeland Security Department.

Even so, the lawmakers argue that with the long, uncertain road toward tax reform just in the beginning stages, the White House should use every tool at its disposal to make the code fairer for all Americans now by writing rules aimed at breaks carved out by the wealthy and wily tax professionals.

“There are unacceptable and outrageous loopholes that have got to be addressed, and I want the president to begin that process,” said Sanders, the ranking member on the Senate Budget Committee. “I think the president does have the power and should exercise it.”

Looking to the executive branch for action on taxes suggests Democrats on Capitol Hill have little faith that they’ll be able to find common ground with Republicans on the sort of broad overhaul of the tax code that top officials in both parties say is long overdue. 

The two sides already have been working on tax reform for more than four years, with little to show for their efforts.

Lawmakers in both parties readily acknowledge tax reform is a massive effort and identify the executive branch as a critical part of it.

“We can make some progress, the administration can make some progress, and they should,” said Sen. Ben Cardin (D-Md.), of the Finance Committee. “But obviously I’d like us to make some fundamental changes.”

Wyden said his report identified a number of executive steps that had previously piqued the interest of the Treasury Department, and action now could help curb unfair practices while the broader reform effort continues.

“These are areas where Treasury has indicated an interest some time ago,” he said. “Tax professionals are constantly getting more clever and more adroit in finding ways around it.”

When asked if pushing for executive action suggested pessimism about Congress’s ability to overhaul the code, he said, “Not at all.”

Sanders, who caucuses with Democrats, specifically called on the administration to roll back provisions that allow multinational corporations to avoid taxes on offshore income, either through tax-free loans or essentially putting profits out of the reach of any country’s tax authorities. 

He also pointed to the carried interest provision that helps hedge-fund managers and asked for further rules to curb the offshore tax deals known as inversions. Treasury Secretary Jack Lew has said the administration is examining what else it can do to limit inversions, but legislation is the best way to stop the deals.

Wyden’s report identified a host of “sophisticated” financial maneuvers that can shrink a tax bill well below the amount that many Americans pay on their paychecks. With names like “wash sales” and “basket options,” the moves typically involve using complex financial tools like derivatives to maximize deductible tax losses and minimize taxable gains.

Democrats argued in the report that Treasury Department rules have failed to keep up with new tactics to minimize taxes. While some of the strategies identified would require legislation to eliminate, a renewed effort by the administration to write tougher rules would also address several approaches.

For example, the report identified one tactic enjoyed by hedge funds, which used a set of basket options to actively trade at a profit, but pay the lower long-term capital gains rate rather than the short-term rate. Democrats said the law is “very clear” that the maneuver is a tax shelter, and the administration has “clear authority to shut down these transactions today.” 

Trimming these tactics could reap “billions of dollars,” Democrats said.

Wyden released the report on the same day the Finance Committee held a hearing on tax fairness. Steven Rosenthal of the Urban Institute said Wyden and his fellow Democrats were right to call out those using the maneuvers to game the tax system.

“You need an investment banker to do these kind of things,” Rosenthal said. “Most of us don’t have one in our Rolodex.”

But he also said that no amount of protest from Democrats will give the IRS the sort of funding it needs to better police complicated tax tactics. He said Wyden’s comments suggest that legislative progress on a range of tax issues will be hard to come by.

“The system is breaking down here, and this is just one example,” Rosenthal said.

Senate Republicans wouldn’t comment directly on the recent proposals from Democrats but made it clear they were uncomfortable with the administration playing a larger role in making tax policy through regulation.

“Lord knows, it seems like there’s no limit to the ways they can find to do things by regulation,” said Sen. John Thune (S.D.), the third-ranking Republican in the Senate.

Senate Finance Committee Chairman Orrin Hatch (R-Utah) suggested Tuesday that was the sort of executive attention he was seeking, but other Republicans said they didn’t think it would be coming. 

“The sun is setting, earlier than later,” said Sen. Johnny Isakson (R-Ga.).