For more than a decade, lawmakers in both parties have lamented the complexity of the federal tax code, even as they layered on new deductions, credits and variable tax rates intended to reward some activities and punish others. The deal struck by the White House and Senate on New Year’s Day to head off the huge tax increases of the so-called fiscal cliff actually made matters worse on the complexity front. The highest marginal tax rate was increased to 39.6 percent from 35 percent for couples earning over $450,000 ($400,000 for individuals). In doing so, however, negotiators increased the total number of tax brackets to seven from six. Tax rates on capital gains and dividends for families earning less than that $450,000 threshold remain at 15 percent, but those who earn more will have some of their investments taxed at 20 percent. And personal exemption and tax deduction phase-outs, known as PEP and Pease, are coming back starting at incomes as low as $250,000. President George W. Bush banished those in 2001. (PEP stands for personal exemption phaseout, and Pease for former Representative Donald J. Pease, the Ohio Democrat who created the deduction cap.) The changes may sound like enough to make you ditch your tax-preparation software and run screaming as fast as you can to a professional accountant. But by the end of the year, efforts in both the House and Senate to overhaul the tax code, simplify it and strip out many bewildering and contradictory tax breaks might bear fruit. That’s because both political parties have an incentive, although not the same incentive, to move forward. “Tax reform is alive and well,” said Senator Max Baucus, Democrat of Montana, chairman of the Senate Finance Committee. “There’s such a need to simplify the code, to help the code be more competitive, to address a lot of inequities,” he said, adding that because the New Year’s tax deal did practically nothing to close loopholes and unclutter the tax code, “the road is clear.” Republicans are being driven by a long-held desire for simplification, pressed hard by the House Ways and Means Committee chairman, Representative Dave Camp of Michigan. Conservatives in the House have been clamoring to take on tax reform since they swept to power in 2010. And after a year of listening sessions, tutorials and hearings, Mr. Camp and the rest of the House Republican leadership want to move forward. For Democrats, it’s mainly about the money. The deal to avert the fiscal cliff contained tax rate increases, which President Obama has been demanding since his 2008 run for the White House. But the rate increases were not as inclusive as those he had campaigned for — he wanted tax rates to rise on incomes above $250,000, dividends to be taxed as ordinary income and inherited estates to face considerably higher rates and lower exemptions from taxation than the final deal demanded. On the estate tax, Mr. Obama wanted to subject the value of estates over $3.5 million to a 45 percent tax, higher than the 2012 level of 35 percent on estates over $5 million. The final deal did get a higher rate — 40 percent — but kept the exemption at $5 million, or $10 million for married couples, indexed for inflation. With that indexing, the exemption comes in at about $5.1 million for 2012 — double for a couple — a level that exempts all but a tiny number of inheritances. By raising taxes on incomes over $400,000, Congress also effectively raised only the top marginal income tax rate, not the top two, as the president and most Democrats had wanted. (It is the “marginal” rate because it applies only to income above a certain threshold.) Raising tax rates further won’t be simple, said Senator Carl Levin, Democrat of Michigan, who as a leader of the Senate’s Permanent Subcommittee on Investigations has spent more than a decade examining tax shelters and dodges. The only way to raise more revenue for deficit reduction at this point, he said, lies with a tax code overhaul that curtails or eliminates breaks that favor the affluent and hits corporations that use offshore tax structures to shelter profits.
