WASHINGTON — After years of clashes and a grudging truce, fiscal and economic policy was brought back to center stage by the wave of Republican electoral victories on Tuesday, with both President Obama and the new congressional leadership expressing hope that deals can be reached to simplify the tax code, promote trade and eliminate the budget deficit.
The president and Senator Mitch McConnell of Kentucky, the presumptive next majority leader, immediately pointed to tax reform, international trade and budget policy as potential common ground for a divided government in Mr. Obama’s final two years in office. Representative Paul D. Ryan of Wisconsin, the Republicans’ last vice-presidential nominee, will seek the House Ways and Means Committee chairmanship to pursue a broad overhaul of the tax code.
And two hard-charging conservatives, Senator Jeff Sessions of Alabama and Representative Tom Price of Georgia, are expected to take over their chambers’ budget committees. Both are considering turning to a parliamentary procedure called reconciliation to cut costs of entitlement programs like Medicare and ease passage of a simplified tax code.
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“Budgets matter,” said Mr. Price, who is currently the Budget Committee vice chairman, below Mr. Ryan. “The role of the federal government to get our fiscal house in order is important.”
The resurgence of fiscal policy should not be surprising. Fiscal rectitude and tax overhaul are matters that unite all wings of the Republican coalition, from the Tea Party right to the Big Business center. They also have strong adherents among good-government advocates in the Democratic Party’s center left.
But there are deep policy differences between Republican leaders and the White House. Chris Krueger, a Washington policy analyst for Guggenheim Securities, told clients Thursday morning that he actually saw the chance of tax reform eroding, not improving, because professions of comity would soon be swamped by budget brinkmanship.
On Wednesday, after both the president and Mr. McConnell raised the same areas of possible agreement, a House Republican tax aide said, “The press conferences make it sound a lot better than it is right now.”
For Mr. Obama, the search for common ground on Republican turf is not new. At least three times, either he or Vice President Joseph R. Biden Jr. has found himself in intensive negotiations with Republican leaders for a “grand bargain” on the long-term budget, only to see them collapse.
The Treasury Department under Mr. Obama has already proposed a detailed plan to broadly overhaul the corporate tax code and bring down the corporate income tax rate to 28 percent from 35 percent. Mr. Obama proposed a novel deal to Republicans: simplify the corporate tax code and allow multinational corporations a one-time low tax rate to bring home billions of dollars in profits parked overseas, but use the windfall from that “tax holiday” for infrastructure spending.
Neither proposal went anywhere.
But on Tuesday, the incentives changed for both sides. Mr. Obama would like to prop up a legacy tarnished by consecutive midterm drubbings and four years of legislative failure. Republicans, now in control of both chambers in Congress, want to show themselves to be a governing party ahead of the 2016 presidential campaigns.
On Wednesday, Mr. McConnell said he had spoken with the president on advancing free trade agreements. He also lamented the fact that the United States now has the highest corporate tax rate in the industrialized world.
“He’s interested in that, and we are too,” Mr. McConnell said of the president. “Those are two serious areas of potential agreement.”
Mr. Obama, just a few hours later, said, “Let’s get started on those things where we agree.”
An opinion article by Mr. McConnell and the House speaker, John A. Boehner, in The Wall Street Journal on Thursday listed “the insanely complex tax code that is driving American jobs overseas” as the first of seven issues they would take up in the 114th Congress.
The last was the national debt, which continues to grow though the annual deficit has receded. The federal deficit fell to less than 2 percent of the gross domestic product in the fiscal year that ended Sept. 30 – below the 40-year average deficit. Economic growth over the last six months was stronger than in any similar stretch since 2002.
But Republican leaders do not see it that way.
“Tax reform is absolutely imperative to get this economy rolling,” said Mr. Price, who could use reconciliation in his first budget blueprint to eliminate the possibility of a filibuster and ease passage. “You can’t just control spending at the federal level to get things back on track. You’ve got to grow the economy, and tax reform is part and parcel of that.”
If the economy keeps growing at a healthy pace, it might ease the path to common ground, since it should make policy choices less draconian. For example, the Balanced Budget Act of 1997, a deal reached between President Bill Clinton and Republican leaders who were pursuing his impeachment, was able reduce the deficit, offer the tax cuts sought by Republicans and create the Children’s Health Insurance Program for Democrats because economic growth was already propelling the deficit to zero.
Republican aides involved in tax reform say the desire to find a deal is real, but the distance between the Republican Congress and the White House is wider than the president or Republican leaders are indicating. Much of the spade work is done. The Treasury’s business tax plan details just how many loopholes would have to be eliminated or curtailed to bring the rate down to 28 percent, a level not low enough for Republicans.
The retiring Ways and Means chairman, Dave Camp of Michigan, produced an even broader tax-code overhaul that would include individuals and small businesses. It included provisions that should have broad appeal among Democrats: a tax on large banks, a surtax on high-income individuals, and a narrower limit on deductions for large mortgages and retirement savings. It also includes a variant of Mr. Obama’s infrastructure spending plan.
The incoming chairman the Senate Finance Committee, Senator Orrin G. Hatch of Utah, joined with the former chairman, Max Baucus, the Montana Democrat who is now ambassador to China, on a series of white papers dissecting every aspect of the tax code. Unlike Mr. Ryan and the ranking Democrat on next year’s Finance Committee, Ron Wyden of Oregon, Mr. Hatch has not made overhauling the tax code a personal crusade, his former aides concede, but also unlike those two, Mr. Hatch has a long history of striking big, bipartisan deals.
“We’ve heard from both sides of the aisle that tax reform that includes lowering the rate is the only way we’re going to keep companies and jobs in this country, and we know it would help raise wages at a time when more and more workers are feeling the middle-class squeeze,” said Senator Rob Portman, Republican of Ohio and a Finance Committee member. “The administration has said they want to engage, so let’s get started.”
But huge impediments could block the path, one House Republican aide said. The White House still would like a tax overhaul to increase revenue to help address the national debt. Republicans want a simplified tax code to produce the same amount of revenue as the current one. And Mr. Ryan believes the faster economic growth that he says such reform would bring should be assumed when the tax take is estimated. That would mean that if faster growth does not materialize, a Ryan tax plan would fall short of its revenue projections.
Bigger still is the scale of ambition. Thus far, Mr. Obama wants to confine the tax overhaul to the byzantine corporate tax code, which would leave the tax forms of individuals and most small businesses untouched.
To Republicans, that is impossible, philosophically and politically. Business lobbies like the National Federation of Independent Business and even the Chamber of Commerce would stand in the way. Republicans would worry that they would be castigated as helping Big Business while ignoring the travails of other taxpayers.
But White House officials say they attained the progressive tax code they wanted when the “fiscal cliff” deal of January 2013 allowed the highest tax rate on affluent families to return to 39.6 percent, after the expiration of a cut passed under President George W. Bush. They worry that any simplification of the individual tax code would reduce tax rates on the rich at the expense of lower-income families.
The window for action is short, given the complexity of the task, Mr. Obama’s lame-duck stature and the looming presidential election. A senior Republican House aide involved in tax policy said that unless both the House Ways and Means Committee and the Senate Finance Committee have drafted and approved legislation, a potential deal would probably slide to the next president.