Tax reform panel wasted time producing good ideas

November 02, 2005|By JAY HANCOCK

Hurricane Katrina couldn't do it. Three-dollar gas couldn't do it. Alan Greenspan hasn't done it, although he's trying harder than ever.

None of them has stopped the U.S. economy, which is chugging along, slowly creating jobs and spreading prosperity. What's going to cause the next recession?

Cue the President's Advisory Panel on Federal Tax Reform.

With laser precision, the panel aimed its biggest tax-reform bullet at the industry that almost single-handedly has kept the economy afloat for years: residential housing. Other proposals would throw lawyers and accountants out of work and discourage consumption in favor of investment, which would trigger the recession if the anti-housing measures didn't do it first.

So the proposals, released yesterday, are terrible, right?

No! They are beautifully simple and fair and would be a huge improvement over the dog's breakfast we call the U.S. tax code. The long-term gains in growth and equity they would bring would compensate for any short-term pain.

It's just that they are so contrary to the prevailing economic and political winds that they have no chance of becoming law. The disharmony is so perfectly in tune, the main planks of the measure so surely destined for sawdust, that you wonder whether the administration is more interested in displaying the appearance of tax-reform efforts than in tax reform.

The panel all but admits defeat at the outset, labeling its effort "noble in purpose" (equal to a "kick me" sign in Washington) and acknowledging that "many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts."

What, they've never heard of a soft sell?

Next year is an election year, yet the panel, led by former senators John Breaux and Connie Mack, proposes to whack the most sensitive bone in the body politic.

It would abolish deductions for state and local taxes, including on real estate, which in many states is the biggest such tax people pay. (The National League of Cities went berserk yesterday.)

And it would replace deductions for mortgage interest, which can amount to a 40 percent subsidy in high tax brackets (including state deductions), with a mere 15 percent credit and a strict cap on the size of the eligible mortgage. This would deflate the housing market almost as fast as 12 percent mortgage rates. (The National Association of Realtors: equally berserk.)

Not all is painful. The panel was directed to simplify and rationalize taxation without changing amounts collected. So government revenue that was gained by abolishing mortgage interest, local-tax and almost all other itemized deductions would be given back through expanded charitable deductions, reducing the marriage penalty, lower brackets, abolishing the alternative minimum tax and other items.

One proposal would tax all capital income - dividends, interest and capital gains - at 15 percent. An alternative would make all dividends paid by U.S. companies out of domestic profits tax-free, which would encourage corporations to keep operations on American soil.

The plan would also make health insurance premiums deductible for everybody - individuals as well as employers. And it would simplify retirement savings plans such as 401(k)s and individual retirement accounts. One tax increase the panel considered but couldn't reach agreement on was a European-style value-added tax, similar to a federal sales tax.

Some of the business proposals are especially interesting. There are two blueprints. In addition to making domestic dividends tax-free, one plan would tax all small businesses at individual rates and allow all small businesses to use cash accounting instead of the more complicated accrual method, one of many simplifications that would reduce work for tax professionals.

The other blueprint would allow corporations to deduct the entire value of capital investment at once instead of amortizing it over several years, which would encourage investment. And it would eliminate the deduction for corporate interest expense, which would discourage companies from tanking up on debt.

All are interesting proposals. And all destined for the shredder.

Even if Congress eventually tackles tax "reform," the result will look nothing like these plans.

True tax reform will come only when Washington deals with taxes the same way it deals with military base realignment and international trade treaties. Let somebody else hammer out the details, and let Congress vote "yes" or "no" without the ability to tinker. But even under that basis, the reform plan released yesterday would be dead on arrival.

jay.hancock@baltsun.com

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