Bush panel vows revamp of tax code

Bush panel vows revamp of tax code

Fri Apr 15, 9:40 AM ET

By William Neikirk Tribune senior correspondent

As Americans faced Friday's deadline for filing their income tax returns, President Bush's advisory panel on tax reform is serving notice that it will propose sweeping changes in the tax code this summer.


Former Sen. John Breaux (news, bio, voting record) (D-La.), co-chairman of the panel, said Thursday that the group is "absolutely" intent on recommending a thorough restructuring of the income tax system rather than a modest simplification or tinkering around the edges.


He also said he favors limiting to one or two the number of tax reform options the panel will submit to the Treasury Department by July 31, rather than four or five options that would include less extensive reforms.


Breaux said the recommended options could include an overhaul similar to the sweeping legislation passed in 1986 or perhaps even a "new tax system," likely featuring a consumption tax, such as a sales tax, or perhaps a flat tax, where all income is taxed at one rate.


The advisory panel issued a strong statement Wednesday calling the current tax code "unstable and unpredictable" and in a "dismal condition," harming businesses, individuals and the U.S. economy.


"Our tax laws have been compared to an overbuilt and dilapidated house with conflicting architectural styles and a crumbling foundation, a sick patient who is about to expire, and a factory that has been littered with so much garbage that it can no longer operate productively," the panel said.


Breaux said this tough language was chosen to send a message to Americans that "the tax system is a mess" requiring quick action.


Congress urged to act quickly


The nine-member advisory group, co-chaired by former Sen. Connie Mack (R-Fla.), also said Congress should move speedily to fix the alternative minimum tax, a levy initially designed to prevent tax avoidance by wealthy people.


Now some middle-class Americans are finding that as they earn more money, they have to pay the alternative minimum tax on top of their income taxes. This year, the panel said 4 million people are paying this levy; next year it will be 20 million.


Doing away with the alternative minimum tax might prevent higher taxes on middle-income Americans, but Breaux said repealing it would reduce revenue by $1.3 trillion over 10 years, making the deficit worse.


Far-reaching tax-reform proposals by the panel would land on top of the administration's floundering Social Security overhaul plan, putting two complex and politically difficult proposals before a bitterly divided Congress.


While the president said Thursday that he is pleased with the progress he has made in pushing his Social Security plan, Breaux said at a Brookings Institution conference that it appears to be going nowhere.


"I think the White House should be looking for an exit strategy," Breaux said. He said members of Congress don't see a crisis in Social Security and that the financial problems of Medicare and Medicaid are much worse.


Former Rep. William Frenzel (R-Minn.), a Brookings scholar who also sits on the president's tax panel, said he and Breaux hope Congress will be able to shake off its gridlock on the deficit and other issues and approve a tax overhaul measure.


"Maybe that is our next best chance" of achieving action on a major economic proposal in Congress, Frenzel said.


A `hybrid' result is seen





Adam Hughes, economist for OMB Watch, a non-profit watchdog group in Washington, said he doubts that the tax advisory panel would recommend junking the income tax system in favor of a consumption tax, such as a national sales tax. But he said a "hybrid" system, combining the income tax with a consumption tax, is a possibility.

Stephen Moore, a conservative economist and president of a political action committee, said, "people have underestimated the possibilities of tax reform. I think there's a greater chance of bipartisan agreement on tax reform than Social Security."

He cited the 1986 tax overhaul law, in which Congress closed many tax loopholes and reduced overall tax rates, as a prime example that tax changes can produce bipartisan action. In fact, Democrats have been less critical of Bush's tax-reform effort than his Social Security plan.

Urban Institute analysts Eugene Stuerle and Len Burman said tax reform is going to be hard for Bush, chiefly because the president has insisted that any plan be "revenue-neutral," raising no more or less money than the current system.

By closing loopholes for some and giving tax breaks to others, any revenue-neutral plan would create winners and losers, they said.

Powerful interests who wound up losing in past tax reforms generally fought the legislation vigorously.

Bush has said that any tax restructuring should protect the mortgage interest and charitable deductions, both of which are part of the income tax system. These deductions would go away with adoption of a sales tax or European-style value-added tax.

Breaux also said he is looking at a proposal to limit the tax exclusion currently provided for health-insurance premiums. Extra money garnered by this idea could be used to expand health-care coverage for the poor, he said.

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Bill's Comment: The sooner the tax code is revamped, the better.