Politics & Policy

Closer, But No Cigar

The president's tax-reform panel is coming up short.

Last week, economic conservatives raised serious concerns that the President’s Advisory Panel on Federal Tax Reform has misconstrued its mandate and is heading in the wrong direction. Under the guise of “tax reform,” the panel actually is contemplating repealing the alternative minimum tax while curtailing deductions for home-mortgage interest and state and local taxes, and also capping the value of employer-provided health care that employees may receive tax free — without any consideration given to lowering marginal tax rates.

It looks now as if the panel does not intend to advise the president on the full range of revenue-neutral tax-reform options available, as he had requested in his executive order “to simplify the code, reduce the costs and administrative burdens, promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.”

Instead of advising the president on the full range of economically sound reform options, the panel appears bent on lobbying the president for the one or two reform options it prefers. By all indications, the panel is behaving more like a legislative committee than an advisory team; it’s negotiating with itself in search of consensus rather than providing the president a broad menu of economically sound alternatives, all of which would satisfy the president’s requirements and be a vast improvement over the current tax system.

More, when establishing the tax rates necessary to meet the president’s request that all options be “revenue neutral,” the panel appears set to ignore the economic effects of reforming the tax base. Since the president’s executive order requires the panel to recommend only options that improve economic growth and job creation, isn’t it a bit curious that the panel is ignoring the beneficial economic effects the reforms are supposed to achieve — in other words, that lower tax rates, and a properly defined tax base which would ignite GDP and job growth, would also generate more tax revenue?

There is also word that the panel will likely recommend a close-cousin to a consumed-income tax with at least two rates, probably 10 and 30 percent. The devil is in the details, of course, but this steeply progressive rate structure holds serious potential problems. For example, as taxpayers move from the lower to the higher bracket, they will experience a 200 percent increase in their marginal tax rate. There is broad agreement within the tax-reform community that any comprehensive reform should inaugurate a single-rate system.

Moreover, much depends on how the panel intends to treat returns on saving and investment and what it plans to do with the corporate income tax, about which there’s been little word so far. I hope the options recommended by the panel define both the corporate and individual tax bases properly. If it does, however, it will meet itself coming round the bend in a head-on contradiction since it already rejected a retail sales tax and a consumption-based tax (such as a business transfer tax).

It will be interesting to see how the panel explains to Sen. Jim DeMint, for example, why the president should not give serious consideration to his proposal to combine an 8.5 percent business transfer tax and an 8.5 percent retail sales tax into a hybrid broad-based consumption tax — especially in light of the fact that President Bush already has expressed considerable interest in replacing the personal income tax with a retail sales tax. In fact, how will the panel explain its refusing to recommend for the president’s consideration any of the other six broad-based consumption-tax systems that all tax the economically proper base through different means?

I am pleased that the panel has heard the voice of economic conservatives and is planning to offer at least one comprehensive reform plan. But in my opinion, this is far from sufficient. There are numerous economically equivalent tax systems from which the president can select. The panel’s job is not to choose for the president, but to provide him the information and framework from which to make an informed choice.

– Lawrence A. Hunter is vice president and chief economist for the Free Enterprise Fund.

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