The White House has begun filling in the details on President Bush's call for fundamental tax reform.
In his acceptance speech at the Republican convention in August, the president said: "The American people deserve and our economic future demands a simpler, fairer, pro-growth system. In a new term, I will lead a bipartisan effort to reform and simplify the federal tax code."
The White House said that the president "will begin this effort by creating, by executive order, a bipartisan panel to advise the Treasury secretary on options to fundamentally reform the tax code to make it simpler, fairer and pro-growth."
The panel will be asked to present revenue-neutral options to the Treasury, at least one of which should be a reform of the current individual income tax system. The president's goals are to make the tax code simpler and to increase long-run economic growth and job creation, according to the White House.
"I'm glad the president and congressional leaders are talking about it," said Chris Edwards, director of tax policy for the Washington-based Cato Institute. "But to be cynical, we're headed for a general election and tax reform is a topic that resonates with much of the electorate. I hope he will back it up with actual teeth."
An idea of where tax reform might be headed can be inferred by the questions the panel will be asked to answer. The panel will be directed to answer 11 questions, according to the White House:
* How can tax reform reduce the administrative burden on taxpayers?
* Should tax reform modify the current system or replace the system with a new one?
* How should the transition from the old to the new system be handled?
* What tax loopholes need to be closed to eliminate tax evasion and ensure that everyone pays his or her share?
* How can reformers ensure that the benefits of tax reform are spread widely among Americans?
* What is the best way to make the tax system progressive, "an attribute that is fundamental to fairness in taxation?"
* To what extent should the tax system be used to achieve goals other than raising revenue?
* How should the tax system deal with different family structures?
* How can the tax system increase economic growth and job creation?
* How can the tax system better encourage work effort, saving and investment?
* How can we make American workers and firms more competitive?
Although the sixth question describes a progressive tax system as an attribute "fundamental to fairness in taxation," this does not rule out a flat tax, according to Edwards.
"A flat tax could be progressive," he said. "[Rep. Dick] Armey went out of his way to emphasize a large family exemption. The effect would be to take millions who pay taxes now off the tax role completely."
Observers differ on the ultimate shape tax reform could take. While President Bush speculated and then backed off from the notion of a national sales tax during the campaign, analysts say that his call for a pro-growth system means a tax system aimed more at consumption and less at savings.
"The steps they've taken so far are moving us toward a progressive consumption tax," said Rudolph Penner, a senior fellow at the Washington-based Urban Institute.
"It's not clear that a bipartisan commission would continue to move in that direction," he said, "but that's the direction they have been moving."
Penner, who was director of the Congressional Budget Office from 1983 to 1987, explained that in its purest form, a consumption tax would report income just as today's income tax, and allow a deduction for any savings.
"What's left over is consumption," he explained. "One way to administer it would be to compute income like today and add the proceeds from any assets and borrowing, then deduct any asset purchases and any repayment of debt."
"Many people who propose a consumption tax at the individual level have proposed something like value-added tax at the business level," Penner said. "Some would have a VAT at the business level but allow a deduction for wages - there are a lot of possible combinations."
"If you just have pure VAT or pure sales tax it would become quite regressive, but it's not practical to rely solely on a sales or VAT tax," he said. "I can't imagine a plumber coming to my house and administering a 25 percent sales tax."
Despite the call for tax reform by the president, it's not necessarily a given that such radical changes will be made, according to some observers.
"Sen. [Charles] Grassley predicted no sweeping change in the tax system unless it is an issue in the presidential election and there is a mandate for it," said George Jones, managing editor of CCH's Washington office. "It looks short of that test at present."
"The wild card is the alternative minimum tax, a growing problem, which may be the catalyst for tax reform - since raising income tax rates to cover any AMT repeal won't sit well with the public, even though the middle class will end up paying the lion's share of any tax under whatever system is developed," Jones said.
"I really think the AMT will force the debate sooner or later," he continued. "It cannot be ignored for another ten years."
"However, I'd say we are still another presidential election away from serious consideration of a flat tax or national sales tax," he concluded.
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