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Archive for Saturday, September 18, 2004

Simplified federal tax code not likely

September 18, 2004

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One of the biggest applause lines in President Bush's acceptance speech was his pledge to "lead a bipartisan effort to reform and simplify the federal tax code."

And Bush never fails to draw cheers when he tells crowds he'll make the tax system "more simple and more fair."

And why not? Everyone agrees the current system is a mess.

Well, don't hold your breath. The federal deficit is so big that simplification may not be the next administration's top priority in tax policy, even if it were politically feasible.

Still, the idea that it's possible to simplify the tax system so that most returns could be filed on a postcard is one of those enduring myths of American politics.

Even the much-touted 1986 tax simplification law wound up complicating the system, notes Bruce Bartlett, a former Reagan administration treasury official and now a senior fellow at Dallas' National Center for Policy Analysis.

Since then, he adds, it's gotten even more complex with the addition of tax credits, deductions and other goodies for specific groups.

Critics deride many of these as "special interest loopholes." But some benefit so many millions of Americans that they constitute a serious barrier to change.

According to the congressional Joint Committee on Taxation, more than 38 million of the 92 million households paying taxes in 2003 deducted charitable contributions, more than 36 million deducted state and local taxes, more than 34 million deducted real estate taxes, and more than 33 million deducted mortgage interest.

Another problem is that many states base their taxes on the federal system.

Eliminating or simplifying federal income taxes might help taxpayers with their federal tax forms, but they'd have to keep the same records unless states enacted similar changes.

Basically, tax reformers have proposed three main alternatives:

  • A flat tax, under which all or most deductions would be eliminated and all taxpayers would pay the same rate. Former House Majority Leader Dick Armey proposed a 17 percent rate years ago, but critics say the rate would have to be at least 20 percent.

That's higher than 80 percent of households currently pay in federal taxes, according to the Congressional Budget Office.

  • A national retail sales tax, which would replace the current income tax system and eliminate the Internal Revenue Service.

House Speaker Dennis Hastert, R-Ill., floated the idea in a recent book, and Bush called it "an interesting idea that we ought to explore seriously." Later, the White House denied he is considering it, but it would presumably be part of the administration's forthcoming study.

William Gale, an economist at the nonpartisan Brookings Institution, said it would take a 26 percent sales tax to replace the income tax and a 38 percent one to replace all federal taxes, assuming no revenue losses.

A sales tax would presumably cover food and medicine and, like a flat tax, would hit lower- and middle-class taxpayers hardest.

  • A value-added tax, similar to those levied in many European countries. It would be added each time a product is sold or resold as it passes from manufacturer to wholesaler to retailer.

Bartlett thinks a value-added tax might have the best prospects -- if not to replace the current system, then to raise additional revenue to cut the deficit.

It would maintain Bush's tax cuts, raise a lot of revenue and create a mechanism that could be used for future increases.

So far, Bush is insisting he won't raise taxes, and Kerry is saying he'll limit increases to the wealthy. Neither position seems tenable on a long-term basis.

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