Despite a fractious political environment, efforts in Congress to streamline and update the country’s labyrinthine tax system are quietly picking up steam, adding a twist to the ongoing debate over federal fiscal policy.

Michigan Rep. Dave Camp, the Republican chairman of the House Ways and Means Committee, last week released his second “discussion draft” related to a comprehensive tax overhaul that he hopes to complete by the end of the year. The proposal addressing the taxation of financial instruments received scant attention from other lawmakers but caused a stir among tax and financial experts, who praised its serious ambition and said it suggested a pragmatic, bipartisan rewrite of the tax code might be possible.

Bolstering that view is word from aides to Senate Finance Chairman Max Baucus that the Montana Democrat has been meeting with Republican and Democratic members of the tax writing panel about policy options in more than two dozen areas, including retirement savings, education and life insurance for individuals and manufacturing and research and development incentives. Once those meeting are over, Baucus hopes to release “a discussions draft or options paper for members and stakeholders to weigh in on later this spring,” a Finance aide said.

The lawmakers are trying to set the groundwork amid uncertainty on the direction of fiscal policy in Washington. Discussions on long-term budget strategies will be going on as the federal government faces draconian spending cuts under sequester, which is set to begin March 1. Tax simplification could be brought into these negotiations by Democrats in search of revenue opportunities, but it also could be overshadowed by the broader budget concerns.

With Democrats pushing for more revenue on top of the $620 billion they won in the recent fiscal cliff deal (PL 112-240) and Republicans insisting on big spending cuts and no further tax increases, the immediate task before Congress, once again, is to reach an agreement on top-line numbers and avert a self-inflicted economic crisis.

Still, Camp promises to keep working on a tax overhaul bill regardless of the circumstances.

A Sweeping Proposal
Although Camp is a veteran House member with a strong conservative voting record, his latest discussion draft confounds conventional wisdom about the two parties.

More than any Democratic proposal to date, it would crack down on the ability of investment firms and wealthy individuals to limit their taxes through the use of complex financial instruments by significantly expanding requirements that investors pay tax, at ordinary income rates, on the increase in value of derivatives that they hold at the end of the year.

Such “mark to market” taxation rules now apply only to banks that issue derivatives, as well as investors in certain exchange-traded contracts. Camp’s proposal would apply it to all derivatives and all investors, apart from those who have bought securities, such as interest rate swaps, to manage risk inherent to their normal business activities.

Camp’s draft includes several other provisions that would make the current taxation of financial products less complicated.

Taken together, the proposals earned praise from a frequent critic of Republican tax policies. “These are interesting ideas that might cure some inequities and raise revenues, and I welcome such an approach,” the ranking Ways and Means Democrat, Rep. Sander M. Levin of Michigan, said in a statement.

Many tax experts also heralded Camp for the substance of his draft, as well as the careful process he has established for producing a larger bill in an era when major bills are often hastily produced behind closed doors.

“Three cheers for Dave Camp,” said Edward Kleinbard, a law professor at the University of Southern California and former chief of staff of the Joint Committee on Taxation. “In contrast to prior experience, and in contrast to the administration, he’s doing two useful things: He’s doing a lot of hard work to come up with large-scale comprehensive tax reform packages, and he’s doing it in an open and transparent way.”

Steve Rosenthal, a visiting fellow at the Urban-Brookings Tax Policy Center, said Camp’s proposal had established “a really strong and valuable approach to tax reform.”

Shift in Discussion
As both conservatives and liberals applaud Camp, the debate over taxes seems poised to move to a new stage.

In recent years, talk of a tax overhaul has been associated with vague Republican promises to dramatically lower personal income tax rates while cleaning the code of unnamed tax breaks. Camp has said his goal is to reduce the top corporate and individual tax rates to 25 percent in an effort to spur economic growth. Democrats have sharply criticized such plans. Camp has softened his stance in recent weeks, however, saying the increase in the top individual income tax rate to 39.6 percent has made him re-evaluate what is achievable.

Even before that shift, Camp signaled he was willing to work with Democrats to make changes to the tax system. Like many other lawmakers, he has favorably invoked the bipartisan tax overhaul of 1986 (PL 99-514) and spoken of the need to make the tax code more predictable, fair and efficient.

Camp has served in Congress since 1991. In December, he was declared cancer free after undergoing treatment for non-Hodgkin’s lymphoma. According to the rules of the House GOP Conference, this will be his last term as the top Ways and Means Republican and so his last opportunity to create a lasting legacy as the author of a major tax bill unless he can get a term limits waiver in the next Congress.

A big goal for Camp, said a committee staffer who spoke on condition of anonymity, is to “go through parts of the tax code that a lot of people aren’t aware of to do a lot of housecleaning.”

But proponents of a tax overhaul face significant obstacles since taxes figure so prominently in Capitol Hill’s partisan battles. And their desire for somewhat technical changes could fail to inspire lawmakers, who may see little reason to upset powerful interest groups for an ambiguous political payoff.

House Speaker John A. Boehner, R-Ohio, recently told an audience at the Ripon Society that there is “a big debate” about how far to pursue a tax overhaul in the House given the immense challenge of getting a bill signed into law.

“That debate is just beginning, and it will probably grow,” he said.

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