Nonreform Reform
Hopes were high that the president’s tax reform panel would start the process of vastly improving the nation’s tax code. But the commission is about to propose unrealistic half-measures.
‘No pain, no gain” is often the warning whenever the subject of tax reform comes up. But what Republican former Sen. Connie Mack of Florida, Democratic former Sen. John Breaux of Louisiana and the seven other members of the President’s Advisory Panel on Federal Tax Reform seem set to recommend consists of lots of pain and little if any gain.
This week, for example, the panel agreed on reducing the cap on that most sacred of the sacred cows — the mortgage interest deduction — from $1 million to about $350,000. This comes at a time when President Bush is earnestly promoting the idea of making America an ownership society. “Recognizing the importance of homeownership” was even one of the panel’s official mandates.
It’s tough to build an ownership society when you penalize the chief means of attaining homeownership — mortgages. These days, even a modest home in some densely populated areas can be worth far more than $350,000.
The panel also favors capping tax deductions for health-care plans businesses provide to employees. This, at a time when the administration is trying to increase employer-provided health coverage through health savings accounts and association health plans.
Deducting health care costs would save workers nearly $2 trillion over the next 10 years — which could make a cap almost as unpopular as ending the mortgage interest break.
These measures are part of the panel’s frantic search to find an offset for the $1.3 trillion it would cost to repeal the alternative minimum tax. But repealing popular deductions just so those at higher incomes don’t have to pay the AMT is a political nonstarter.
Cutting or eliminating sacrosanct deductions such as mortgage interest and employer health care might be possible in the context of a massive overhaul in which rates are reduced. But this “tax reform” panel apparently refuses to consider real tax reform.
No doubt the official constraint on the panel that its proposals be limited to “revenue-neutral policy options” discouraged bold recommendations. The conventional wisdom in much of Washington is that cutting taxes on savings and investment is always a revenue loser. Many still refuse to factor in the new revenues that come from the economic growth ignited by the right kind of tax cuts.
So this panel missed a golden opportunity. It could have outlined in detail the various reform ideas — a national sales tax, a flat tax, a value added tax or the various ways of changing our present income-tax structure so that it shields savings and investment from taxation. Instead, it has chosen timidity.
With the top 10% of taxpayers paying two-thirds of all federal income taxes and the bottom 50% paying just 3.5%, there’s a dire need to rework our tax system so that penalizing success stops being the tax man’s chief motivation.
