A complete overhaul of the federal income tax system - one of the top legislative priorities for President George W. Bush last year - appears to have slipped off of the administration's radar screen altogether in 2006, congressional leaders charged.The latest indication that White House interest in tax reform has cooled during the past year: Top Treasury Department officials declined to testify at a recent round of Senate Finance Committee hearings to discuss the issue.
That hearing was designed to explore the department's response to the recommendations of the President's Advisory Panel on Federal Tax Reform - a group that last October advanced two alternative approaches for streamlining the tax code and closing the mammoth $345 billion tax gap.
But while several members of the White House advisory panel testified at the hearing, the absence of officials from the Treasury seemed to confirm congressional suspicions that the administration has lost interest in tax reform.
"Tax reform not only went from the front burner to the back burner, it got knocked off the stove," the Finance Committee's top Democrat, Sen. Max Baucus, D-Mont., fumed. "It got kicked out of the kitchen."
However, the Treasury said that the office declined to appear because new Treasury Secretary Henry Paulson wanted to get "up to speed" with regard to tax reform and subsequent proposals.
If the administration is indeed backsliding in its support for tax reform, the testimony of several witnesses at the hearing suggested that this may be a particularly inopportune time to abandon that effort.
If not now, when?
U.S. Comptroller General David Walker painted an especially bleak picture, warning that without a restructuring of the tax system, the U.S. will sink steadily deeper into the red.
"The debate about the fundamental design of the tax system is occurring at a time when the nation faces a large and growing structural budget deficit," Walker told the committee. Unless there is a change in "current policy, the gap between revenues and spending will widen over the next few decades."
MIT economics professor James Poterba also called for quick action on tax reform, noting that the time is ripe to move on fundamental tax reform because of the large number of expiring income tax provisions that require ongoing debate and re-authorization.
"Uncertainty surrounding these provisions, such as the future tax rates on dividends and capital gains, hampers taxpayer planning and discourages long-term investments," he testified. "Moreover, the looming problem of the alternative minimum tax creates even more uncertainty for many taxpayers."
Although Congress has addressed the expanding impact of the AMT through a series of short-term fixes, Poterba suggested that time is running out for such band-aid solutions.
"As the revenue cost of such temporary solutions rises ... they will become ever more difficult to sustain," he told Senate tax writers. "It would be far better to enact a permanent AMT fix that would not require annual or semi-annual adjustment, than to continue with the current strategy of short-term remedies."
All the president's panelists
Although Treasury tax officials insist that the administration remains committed to reform of the income tax system, their continued silence in response to the advisory panel's recommendations has fueled suspicions that they are disappointed with both options endorsed by that group.
The panel's final report recommended two alternatives for reforming the tax system: a "simplified income tax" plan and a "growth and investment tax" plan that includes some consumption taxation.
Significantly, however, the president's blue-ribbon advisory panel gave the thumbs-down to a full-blown switch to a consumption tax, such as a national sales tax or a European-style value-added tax.
In her testimony before the Senate committee, University of Southern California law professor Elizabeth Garrett said that "a national retail sales tax should not continue to have the prominence on the political agenda that it currently enjoys."
Garrett, who served with Poterba on the tax reform advisory panel, told Congress that the group rejected the sales tax option because, "It would not provide adequate revenue at reasonable rates," and because it "meets none of the goals of a healthy tax system."
The most prominent national sales tax scheme - the so-called "Fair Tax" plan - "is not a realistic proposal for the country," and "would harm many of the very people who support it," she said.
Garrett also rejected the value-added tax as a replacement for the income tax, but acknowledged that a VAT deserves some consideration as a replacement for the current Social Security payroll tax.
The panel's disdain for replacing the income tax with a tax on consumption - an approach that some say is favored by top Treasury officials - may explain the department's reluctance to endorse the advisory group's recommendations.
According to Baucus, Treasury officials tipped their hand earlier this year by publishing a paper extolling the virtues of a consumption tax.
Who benefits?
While the Treasury and the administration drew most of the flak for failing to press for tax reform, tax professionals were also blamed for the lack of progress.
Even though the accounting profession has repeatedly called for simplification of the federal Tax Code, the GAO suggested that tax practitioners are undermining efforts for reform.
"One reason that reform is difficult to accomplish is that the provisions of the Tax Code that generate compliance costs, efficiency costs, the tax gap and inequities also benefit many ... individuals and companies that advise taxpayers and help them with their tax-filing obligations," the agency said.
