Jewish World Review Sept. 15, 2004 / 29 Elul, 5764

Terry Eastland

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Second Bush term could bring radical tax change | The president sworn in early next year will push for major tax legislation. George W. Bush would make permanent his across-the-board tax cuts, while John Kerry would carve in stone only those cuts for households with incomes up to $200,000. Those making more would be taxed at higher rates.

That is a major difference between the two candidates, but not the biggest one. Mr. Kerry's tax proposals assume that the current tax system — notwithstanding its infuriating complexity (the Internal Revenue Service says the "short" income tax form now takes more than 11 hours to prepare) — is basically OK. Mr. Bush is willing to consider major, even radical, change. He's called for a "simpler, fairer, pro-growth system," and he will appoint a bipartisan commission to study how those goals might be achieved.

The White House handout on the topic ends with this sentence: "The panel will be asked to present revenue-neutral reform options to the secretary of the treasury, at least one of which should be reform of the current individual income tax system." The panel won't be doing its job if it fails to build on Mr. Bush's tax cuts and suggest a flat-rate consumption tax.

A consumption tax falls on what you spend, not on what you save or invest. Such a tax is manifestly pro-growth, since it encourages saving and investment, and thus greater production. A flat-rate consumption tax also would create greater incentives for individuals to work and produce. It also would be the simplest.

Since Mr. Bush took office, not only have rates on income for all individuals been reduced, but so have the rates on capital gains and dividends. And the estate tax, which is levied on a lifetime of savings, is being phased out. These changes take the first steps toward a flat-rate consumption tax.

To reach that destination, it wouldn't be necessary to scrap the current system. The imperative instead would be to finish the job of eliminating taxes on capital gains, dividends and interest. The personal income tax we so admire on April 15 would thus mutate into a consumption tax.

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As the economist Bruce Bartlett explains in Commentary magazine, "There are only two things that can be done with income: It must be either saved or consumed. Absent a tax on saving or investment, the full burden of taxation must logically fall on consumption."

As for what the "revenue-neutral" flat rate might be for a consumption tax, consider that the lower the rate, the broader the tax base must be. And its breadth will depend on the extent to which the many loopholes that now complicate the current system — some of which, alas, came from the Bush tax cuts — can be closed.

The most hopeful, not to mention naive, flat-taxers say the rate could be 18 percent or 19 percent. That would exclude the first $10,000 to $15,000 of income from taxation. Yet if, in pursuit of fairness, the goal is to protect poorer citizens from paying higher taxes than they currently do, the amount excluded might have to rise by an additional $5,000 to $10,000. That means the flat rate would rise some, too.

The Bush commission doubtless will review other ideas, among them a national sales tax (beware of winding up with that tax plus the current income tax!) and a value-added tax (used widely in Europe). But surely it will present a flat-rate consumption tax.

The Kerry campaign dismisses the commission as an election-year gimmick. That fails to recognize the Bush administration's long interest in shifting taxes toward consumption. If the president is re-elected, watch this commission: It could help initiate a momentous and welcome change in the federal tax code.

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JWR contributor Terry Eastland is is publisher of The Weekly Standard.Comment by clicking here.

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© 2004, Terry Eastland