11/12/2012 01:56 pm ET Updated Jan 12, 2013

What to Expect When You're Expecting Tax Reform

Despite the rhetoric from both sides of the aisle about changing tax rates, history tells us that dramatic change is unlikely. Within hours of the conclusion of the 2012 election, partisan leaders began drawing lines in the sand with respect to tax policy, and tax rates in particular. Speaker of the House John Boehner stated on November 8, "Raising tax rates is unacceptable ... It couldn't even pass the House." Shortly thereafter, Senate Minority Leader Mitch McConnell asserted that, "[T]here is no consensus on raising tax rates, which would undermine the jobs and growth we all believe are important to our economy." At the same time, President Obama's spokesman indicated that the president would veto any extension of Bush-era tax cuts that would include tax cuts on household incomes above $250,000.

It is clear that tax rates will be in the forefront of political negotiations even before the new congress is seated, with Democrats at the helm in the Senate and the White House, and Republicans controlling the House of Representatives. With the imminent expiration of tax rate cuts originally passed in 2001 and 2003, partisans leading the divided federal branches must either compromise their positions or face public ire for either raising rates across the board (if no action is taken and the cuts are allowed to expire wholesale) or kicking the revenue can even further down the road (if the cuts are extended wholesale). What is unclear is whether either party will have the ability to deliver on tax rate promises made to their respective constituencies.

History tells us that significant changes to tax rates are unlikely when there is divided partisan control of the federal government. A perusal of the historical tax rate tables found on the Tax Foundation's website reveals several trends with respect to partisanship and tax rates. Initially, large rate swings from one year to the next are extraordinarily rare and almost always tied to significant political movements or national crises. Second, total political party control matters, as tax rate increases or decreases have historically been accomplished when one party controls the House, the Senate, and the Oval Office. Third, political rate maneuvers are most often implemented in the upper middle class and higher income ranges, whose rates are adjusted relatively frequently.

The Tax Foundation's charts allow us to review the impact of rate changes on various income levels, adjusted for inflation to 2011 dollars, throughout the last century. Looking at increases to the highest marginal rate applicable to single taxpayers with taxable incomes of $10,000, the most obvious trend is that in every instance of an increase in the top marginal rate applicable to such taxpayers (ignoring changes attributable solely to inflation-adjustments), Democrats controlled the House of Representatives. Indeed, in eight out of ten occasions when the rate was raised, Democrats controlled the House, the Senate, and the Oval Office. If we look to decreases in the highest marginal tax rate applicable to $10,000 taxable incomes, the patterns are less apparent, but clearly total party control still matters. In seven of ten years in which the decrease in the top marginal rate on taxpayers with $10,000 of taxable income was implemented, the same party controlled the House, the Senate, and the White House. In five of those years, Democrats controlled the relevant offices. Accordingly, Democrats appear to be far more historically active than Republicans in tax rate changes, both increases and decreases, at least at the lowest income levels. This trend is surely in part due to the longer eras of Democratic control, particularly of the House of Representatives.

We see far more frequent adjustments to the top marginal rate applicable to those with an inflation-adjusted $100,000 taxable income. Democrats controlled the House, Senate, and Presidency eleven of the thirteen years in which rates were raised on the $100,000 group. The only Republican presidents to actively raise the highest marginal rate on this group were Herbert Hoover and George H. W. Bush. In contrast, four different Democratic presidents (Woodrow Wilson, Franklin D. Roosevelt, Harry S. Truman, and Lyndon B. Johnson) raised rates on this income group. Indeed Wilson raised the top rates on $100,000 taxable incomes three times, Roosevelt did so four times, and Truman was involved in two active increases. Shifting to decreases, there were sixteen years in which the top marginal rate applicable to the $100,000 range was lowered. In six of those sixteen years, Republicans were in control of the House, Senate, and Presidency. In eight of the sixteen decrease years, Republicans controlled the House, and in twelve of the sixteen years a Republican was in the White House.

The rate changes in the $100,000 taxable income bracket demonstrate the most clearly defined partisan battleground in the tax code. Not only are the top rates frequently increased and decreased on this income group (thirteen increases and sixteen decreases compared to ten increases and ten decreases on $10,000 taxable incomes), but the increases are overwhelmingly attributable to Democrats and the decreases to Republicans.

In 2012, the tax rate battleground again appears to be on the higher income brackets. Although certainly other factors, including the availability of deductions and credits and the applicability of the alternative minimum tax, affect overall tax burden, rates are the most high profile and transparent changes that politicians can make to the tax code. Indeed, President Obama appears to be holding firm in his stance that families earning less than $250,000 should not face tax rate increases, and Republicans would take all tax rate increases off the table. For now the Republicans may have an advantage if the historical trends continue. Although Democrats will continue to occupy the Oval Office and majority control of the Senate, the House is where revenue bills must originate, and power in that legislative body has been nearly essential to accomplishing tax rate changes. Those on either side of the aisle fearing dramatic rate change should take comfort in the fact that such shifts seldom happen from one year to the next. There has been only one double-digit increase (11 percentage points in 1941) in the top marginal tax rate on taxable incomes of $100,000. In the same vein, those hoping for dramatic tax rate adjustments will likely be disappointed. For all of the hype that tax policy generates in the partisan political discussion, very little change manifests in the form of significant rate change. With split partisan control of the federal government for at least another two years, there is no reason to believe major tax rate reform is coming.