Archive for Sunday, November 3, 2002

Study seeks to simplify tax system

November 3, 2002

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— The Treasury Department is studying ways to revamp the tax system, perhaps by taxing spending instead of earnings. Republicans say the exercise is aimed at enhancing fairness and simplicity; Democrats say it's driven largely by politics.

Treasury officials are offering few details, but private analysts say that among options are shifting federal revenue collections toward a national sales tax, a "flat" or single-rate income tax or a value-added tax. A value-added tax is in effect a sales tax imposed at each level of production of goods and services and is widely used by European governments.

"We're looking at simplification proposals ranging from the very narrow to the broad," said Michele Davis, spokeswoman for Treasury Secretary Paul O'Neill.

Davis said the Treasury effort was a wide-ranging response to a request President Bush made early this year for simplification proposals. She said she was not sure when recommendations would be ready for him, though others outside government said they believed Bush could have the ideas in hand by next spring.

Though nearly everyone agrees that the tax code is far too complicated, there are stark disagreements between the two parties over possible remedies.

Should Bush commence a major effort to overhaul the tax system, it could become a top-tier political issue by his 2004 re-election campaign, although partisan disputes probably would hinder enactment of changes until later.

"No matter how you do it, it's a very, very tough road politically," said Eugene Steuerle, a Treasury Department official under the first President Bush and now a senior fellow at the Urban Institute.

Since tax laws were last streamlined in 1986, they have grown ever more complex. Both parties have periodically proposed solutions. Republicans have generally focused on easing taxes on many corporations and private investors, while Democrats generally have been more protective of lower-income people.

Should Bush choose to focus on changing the tax code, it could help Republicans by shifting the political debate to an issue the GOP traditionally dominates and away from revamping Social Security, the budget deficit and other areas where they might fare worse.

Democrats would get a chance to offer their own ideas, however, and could take the offensive if Republican proposals shift the tax burden from businesses and the wealthy to lower-income people. The big questions would be who wins and who loses.

"If they want to shift the corporate tax burden to individual taxpayers, I don't think anybody is going along with that," said Rep. Richard Neal, D-Mass., a member of the tax-writing House Ways and Means Committee.

With budget deficits roaring back, lawmakers would be under pressure to recoup most if not all the $150 billion raised annually from corporate income taxes and the $860 billion a year from individual income taxes. Overall, the government collects $2 trillion in revenue each year.

O'Neill said in an interview last year he favored repealing the corporate income tax. Conservatives have long argued that corporate income taxes make U.S. companies less competitive and end up being passed on to consumers through higher prices.

Most Democrats are determined that any changes embrace the current code's philosophy of taxing the wealthy at higher rates than the poor.

They argue that most proposals to tax personal spending instead of income shift more of the burden to low-income people simply because the poor spend a greater proportion of their income than the wealthy, who are able to invest much of their money.

Altering the income tax also would require lawmakers to look at the current deductions, many of them widely popular or with powerful constituencies behind them. These include tax breaks for home mortgage interest, health insurance costs, charitable contributions and depreciation of corporate assets.

In one example of how complicated a transition to a new tax system would be, William Gale, a tax analyst at the liberal Brookings Institution, said it would take a flat tax rate of 21 percent to recoup revenue that would be lost from eliminating the current individual and corporate income tax code.

The rate would grow to 32 percent if several popular deductions were retained, such as breaks for home mortgage interest and depreciation on corporate investment and loans, he said. The current top rate is 38.6 percent, but most taxpayers pay 15 percent, which means many of their tax bills would grow unless further adjustments were made.

Davis said the Treasury effort includes a study of two areas of corporate tax law that have generated controversy in recent months.

One covers companies that move headquarters overseas to avoid paying some U.S. taxes, the other tax credits provided to some American exporters. The World Trade Organization has ruled that those credits are illegal subsidies and has imposed $4 billion in sanctions against the United States.

On the Net:

Internal Revenue Service: http://www.irs.gov/

World Trade Organization: http://www.wto.org/

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