Taxpayers can expect little in the way of tax reform

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Millions of Americans will spend some frantic time this weekend trying to cope with federal tax forms that seem more complicated and time-consuming each year. There’s no reason for them to expect relief anytime soon.

Despite the widespread belief that tax reform is long overdue, there’s little sign of serious action on an issue President Bush made one of his top second-term goals. The reasons: a lack of consensus on what to do; insufficient support for any single proposal; and a growing deficit problem that may turn any tax reform debate into one on the need for a tax increase.

It wasn’t supposed to be this way. After winning re-election, Bush said voters had given him a mandate to reform the Social Security and tax systems.

But he overstated the extent of his mandate. And the Iraq war and its fiscal impact have dominated the congressional agenda.

Besides, Bush put conditions on both issues that limited his ability to gain the broad support needed for major changes.

On Social Security, it was his insistence on stressing private accounts over long-term solvency. On tax reform, it was the requirement that his study commission only consider proposals that were revenue neutral. That kept it from proposing anything to address the deficit he’ll leave his successors.

The tax reform panel further limited its options by assuming that tax cuts enacted early in his term would become permanent, even though Congress, so far, has refused to extend them beyond the cutoff dates that were included to make them seem less expensive.

That meant any proposal to trim them back would be regarded as a tax increase, which this administration has vowed to oppose.

Finally, the panel included some political non-starters in last fall’s report. It voted to curb deductions for charitable contributions and home mortgage interest and end them for local and state taxes and real estate taxes.

Unsurprisingly, the commission’s proposals sank like a stone, not even considered seriously by the administration, let alone the Republicans who run Congress.

Instead, the administration is pushing two bills aimed at curbing the deficit by spurring growth.

One would limit the increasing number of middle-class taxpayers who pay the Alternative Minimum Tax, which is intended to ensure that wealthy taxpayers with investment income pay their share. The other would make permanent the reduced, 15 percent tax rate on dividend income and capital gains due to expire after 2008.

“The only way to eliminate the deficit in the long run is through growth,” chairman Edward Lazear of the Council of Economic Advisers told a tax panel sponsored by the conservative Hoover Institution.

But lawmakers are stalemated on those issues, too.

Meanwhile, serious policy thinkers in both parties and a variety of interest groups have been studying the broader tax issues and have come up with a variety of proposals that might be part of the debate when the issue returns to the top of the policy agenda, possibly next year but more likely after the 2008 election.

They vary from simple but controversial proposals such as the flat tax, which would tax earned and unearned income at the same rate, to a plan by Rep. Chaka Fattah, D-Pa., to replace personal and corporate income taxes with a transaction fee on every business purchase, financial deal or retail and wholesale sale over $500 that uses a check, cash or credit card.

A recent tax seminar at the liberal Center for American Progress included discussion of both the substance and timing of any future reform effort. Some felt the issue should be part of a broader debate including the deficit and projected shortfalls in entitlement programs. Others favored addressing tax issues in small doses.

Maya MacGuineas of the New America Foundation, a 2000 campaign adviser to Sen. John McCain, predicted that when Congress gets serious about fixing Social Security, Medicare and Medicaid, “taxes will go up” because “no matter how you reform the nation’s entitlement programs, there will not be sufficient revenue.”

William Gale, an economist with the Brookings Institution, said he thought the key to action was a return to the divided government of the 1990s.

“I don’t see us doing anything until we have Democratic control of one house or the White House – so Republicans have someone they can compromise with,” he said. A deal, he said, might include private accounts and a tax increase.

Until then, taxpayers can expect little real relief from the annual burden of filling out tax returns.

Carl P. Leubsdorf is Washington bureau chief of the Dallas Morning News.

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