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Commentaries
Tax Reform
Savings,
Retirement and Social Security Reform
Contributing
Members Commentaries
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Realistic Definition Of Tax Reform Will Help
In Getting The Job Done
Investor's Business Daily
April 25, 2005
By Ernest S. Christian
The President's Tax Reform Advisory Panel is
about to complete the first phase of its work.
In a kind of Tax Law 101 tutorial, it has been traveling the
country listening to experts describe operational details
and characteristics of the current federal income tax. It's
heard from economists, academics and former Treasury Department
officials, as well as from beleaguered taxpayers.
As a result, panel members have a more than ample catalogue
of the many ways in which the tax code harms the economy and
frustrates taxpayers.
The next step is for the panel to figure out how best to cure
the code's most damaging defects in a way that can actually
get enacted into law. There's no need for another round of
"virtual" tax reform - as has occurred in the past,
when reformers sought to make the code conform to some academic
notion of perfection outside the realm of practical political
reality.
President Bush has defined tax reform in realistic terms:
make the tax code simpler and more conducive to economic growth.
To that end, he selected an advisory panel that is, by leadership
and composition, wellsuited for the job of making tax reform
a practical success.
There's no reason for the panel to be constrained by the politics
or ideologies of the past. It has the strong backing of the
president. His political party controls both houses of Congress,
and the anti-growth biases of the tax code are intellectually
discredited and short on political support.
Get Rid Of The Bias
In the past, some people sought to excuse those biases in
the name of "fairness." But there's nothing fair
about tax policies that destroy jobs and lower living standards.
And today, just about all members of Congress in both political
parties understand that fact.
The panel can accomplish the goal of removing the existing
tax barriers to economic growth in two ways. It can remove
the offending provisions from the current income tax or it
can replace the current income tax with a new tax system that
does not have those anti-capital, anti-growth biases to start
with. In neither case is it necessary to reinvent the wheel.
If the decision is to repair the income tax, a few familiar
amendments to the tax code would do the job. Dozens of bills
have been introduced in Congress that would accomplish major
tax reform within the framework of the current income tax:
Personal savings would no longer be double taxed. Business
investment in capital equipment would be expensed in the year
pur-American companies would be allowed a better opportunity
to compete in global markets. And if they win, they could
bring their profits home for investment in America, instead
of being forced by the tax code to reinvest their money abroad.
The statutory language to make these changes is already drafted
and available. The economic consequences are well known and
salutary.
Hybrid System
If the panel opts to recommend "big bang" tax reform
- by replacing the current tax code with a new one - here
again they do not have to start from zero. The plausible replacements
for the current income tax are available "off the shelf"
- most of them having been worked out in detail by countless
congressional hearings, Treasury studies and academic colloquia
over many decades.
In the 1950s, the focus was on a "cash flow tax."
In the 1970s, the favorite was either a consumed-income tax
or a value added tax. In the last two decades, several combinations
and permutations have been crafted in an effort to make the
tax code simpler and less destructive of economic growth.
Most recently, one such hybrid, an unusual bipartisan effort
with its own brand name - the Simplified USA Tax - came exceedingly
close to achieving the ultimate goal of "taxing all income
alike and only once." It did so in a statutory framework
that resembled a plain-English version of the current income
tax reduced in size by about 50%. It preserved deductions
for home mortgage interest and charitable giving. And it provided
a way of equalizing the treatment of all international trade
income - including removal of the double tax on U.S. exports.
Despite their different structures and terminologies, most
of the plausible alternatives to the income tax tend to produce
bottom-line economic results not greatly different from the
economic results of a "reformed" income tax - one
that's been amended to eliminate double taxation of savings
and investment and to allow U.S. firms a fair chance to compete
globally.
Most of the alternatives suffer from two fundamental defects.
First, they are inconsistent with some of the president's
instructions to the panel. Second, they are not politically
viable.
When he created the panel, Bush instructed it to develop recommendations
that preserve tax benefits for home mortgage interest and
charitable giving. Except for the Simplified USA Tax, none
of the alternatives being discussed is structured to make
retention of these deductions feasible.
Furthermore, there is little realistic chance that any of
the big-bang alternatives could be enacted into law right
now. Fact is, neither the public nor Congress understands
any of them well enough to be comfortable with the idea of
taking the plunge into an unfamiliar tax system. Americans
may love to hate the income tax they know, but they are unlikely
to trade it for something that to them is a mystery.
Two key amendments to the current tax code - elimination of
the double taxation of savings and allowing first-year expensing
of business equipment - would achieve 70% to 80% of the economic
benefits of even the best of the big-bang replacements. And
the benefits of these straightforward amendments can be understood
- and accepted - by the American public and Congress.
These two critical changes to the current income-tax code
should thus be the linchpin of the panel's recommendations
for immediate enactment.
The panel should not stop there. Recognizing that tax reform
is not a one-time-only event, the panel should also recommend
the creation of a task force to begin its work after the first
two linchpin amendments to the current code have been enacted.
The mission of the task force would be twofold. First, focus
on making the code simpler and more understandable. Second,
develop additional reform proposals in the international tax
area that would further enhance the ability of U.S. companies
to compete in foreign trade.
Foundation In Place
In this additional round of tax reform, there would be no
need for the task force to start with a blank slate. Indeed,
the panel should include in its report the recommendation
that the starting point be the Simplified USA Tax - a fully
developed proposal that not only simplifies the tax code,
but also contains the key ingredients of a vastly improved
international tax regime.
With respect to both aspects of tax reform - economic reform
and simplification - the panel should keep in mind the words
of professor James Eustice and not lose sight of the fact
"that there are people out there . . . (who must) function
under this system."
Christian is a former Treasury tax official who is director
of the Center For Strategic Tax Reform in Washington, D.C.
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