Tax reform under the second Bush administration will most likely take the form of piecemeal tax cuts, according to participants in a tax panel sponsored by the Council for Electronic Revenue Communication Advancement, a government-private industry trade association. President Bush has said that he would appoint a panel to recommend changes to the tax code that would make it simpler, fairer and less burdensome.
"We're in tax reform where we were four years ago on Social Security reform," said Grover Norquist, president of Americans for Tax Reform and a member of the National Commission on Restructuring the Internal Revenue Service. The hard-line conservative Norquist was formerly an economist with the U.S. Chamber of Commerce.
"Social Security changed in 2000," said Norquist. "It was considered the third rail of American politics - no one dared touch it. President Bush not only touched it, he fondled it in public. What he won was the right to have a civilized discussion on the topic."
"President Bush has now won the right to have a civilized discussion on tax reform," Norquist said. "Eventually you are talking about getting to a single rate of tax that taxes income one time. Some people think that could be a retail sales tax or a flat-rate income tax, but that's a long way off. It's a huge project that is not going to happen in the same time frame that we're reforming Social Security."
"Look at the last four years to see what will happen in the next four years," Norquist predicted. "We had four tax cuts in the last four years. Every one of them moved us towards a single-rate tax. We'll see four tax cuts in the next four years which will move towards a single-rate tax that taxes income one time."
The next year will see the abolishment of the estate tax made permanent, according to Norquist. "Right now you get taxed when you earn, again when you save, and again when you get dividends. And if you're stupid enough to die, they tax you again," he said. "They keep coming back, which is expensive in terms of privacy and efficiency, and impedes the creation of capital. Why not tax income one time, either when you get it or when you spend it? The government needs to know less about you when they only need to focus on that one point."
The one-rate goal is important, said Norquist, not out of a sense of fairness but because "when you raise or lower taxes you're talking to the whole country and you're treating everyone the same. Clinton said in 1992, 'I'm only going to hike taxes on 2 percent, the rest of you pay no attention.' Then he came back and taxed people who drove cars and then people who got Social Security."
"This is the Richard Speck theory of tax increase - if you can't take them out of the room all at once, you take them out in small groups," Norquist said. "The reason you want a single- rate tax is so you never get to the position where you can take any group out of the room one by one - you have to talk to everybody at the same time."
Peter Orszag, an economist with the Brookings Institution and a former special assistant for economic policy in the Clinton Administration, agreed with Norquist in that, "we're headed toward zero taxation of capital income, and it is much more likely that we'll attempt to get there in a piecemeal approach."
"However," he said, "I disagree that the piecemeal approach actually gets you to the ostensible benefits of a consumption tax. In some things in life you can go step by step and get to the end result. In other things, like trying to jump across a chasm in two steps, it just doesn't work. Tax reform is one of those things where if you try to do it step by step you end up with the worst of all worlds."
The current goal is the opposite of the approach taken in 1986, according to Orszag.
"In 1986, we had a comprehensive reform which moved us toward a real income tax, not toward a tax on consumption," he said. "The 1986 reform shut down the investment tax credit, it tightened up the depreciation schedule and IRA rules, and it got rid of the capital gains tax preference - exactly the opposite of moving toward zero tax on capital income."
"Furthermore," he said, "it got the dynamics of doing a comprehensive tax reform right, which is that it had the pain and the gain in one step. The problem with the piecemeal approach is that you're giving away all of the candy before serving the broccoli, and guess what - when people get to the end of the dessert, they don't want any dinner."
"You lose the opportunity to gather in a comprehensive plan the things that could offset each other and make the overall plan worthwhile, which means you never do the painful part," he continued.
The 800-pound gorilla
Orszag warned that fiscal and monetary considerations would impact the coming deliberations on tax reform.
"The context in which the discussion is taking place will change substantially if the foreign creditors who are letting us borrow $600 billion a year decide that it is not such a wise portfolio choice on their part," he said. "I think there's a significant probability of that occurring in the next few years, if we fail to address the underlying fact that we as a nation are saving less than 2 percent of our national income, the lowest since 1934."
Jeffrey Trinca, vice president of Washington-based Van Scoyoc Associates and former chief of staff of the IRS Restructuring Commission, agreed.
"Never underestimate the effect that a deficit has on federal policy," he said. "The goal of trying to broaden the tax base and flatten the rates occurred, but in order to get there, a lot of bad law was put into place to try to preserve revenue."
"And then, the first five or six years out of the chute, the reconciliation bills just hammered the whole concept of simplification and put pressure on the flat rates," Trinca continued. "The deficit will certainly shape what comes out in the end."
