First things first

November 07, 2005

The proposals of the presidential panel charged with reforming this nation's Byzantine tax code run from the useful to the provocative to missing the point entirely.

Release of the tax reform recommendations Tuesday didn't trigger a lot of support, and there's skepticism as to the White House's ability to achieve something so difficult given President Bush's unpopularity. But making the U.S. tax system much simpler and fairer is a very important effort that should move forward - though only in tandem with a badly needed attack on the nation's dangerous budget deficits. Distressingly, that wasn't part of the panel's charge.

Without question, the most useful idea from the White House advisory group is canning the Alternative Minimum Tax, a second income tax system designed to ensure the super-rich pay at least some taxes but that increasingly hits the middle class. Scrapping the AMT would cut tax revenues by $1.3 trillion over the decade from 2008, raising the question of how to make up that revenue.

That's where the provocation begins: The White House panel went after perhaps the most popular tax break, the mortgage interest deduction, proposing to replace it with a capped 15 percent tax credit. That might be smart, because the deduction disproportionally benefits upper-income earners, and it distorts investment toward housing. But doing away with it is unlikely: The change would cut housing prices by perhaps 20 percent, and it's being offered as rapidly inflated house prices - which have been propping up the U.S. economy - already may be softening.

Another provocative reform involves a dramatic shift in the burden of taxation away from capital to work. There would be expanded tax-free saving vehicles, likely used mainly by the well-off, and interest, dividends and capital gains would be tax-free or subject to far lower rates than wages. This might encourage savings, but it also would unfairly tilt the tax code toward investors, at the expense of workers, and the long-term revenue losses from tax-free savings would accelerate the nation's budget deficits.

These deficits weren't addressed by the panel. Indeed, from the start, the group was instructed to presume that the temporary Bush tax cuts of 2001-2004 would be made permanent after 2008 - even though that would cost an estimated $7 trillion over the next two decades. Not only haven't these cuts been made permanent yet by Congress, but proposing sweeping tax reforms while ignoring their huge costs is both disingenuous and in keeping with the Bush administration's fiscal recklessness. Yes, let's have a fairer, simpler tax code, but this should not take place without tax changes that contribute toward balancing the federal budget - and that likely involves returning to tax rates similar to those before Mr. Bush took office.

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