Jewish World Review Nov. 22, 2004 / 9 Kislev, 5765

Robert Robb

JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
James Glassman
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
Michelle Malkin
Jackie Mason
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Roger Simon
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

Tax reform limited by, uh ... tax reform | It's encouraging that President Bush has made tax reform such a second-term priority. But practical limitations, some of Bush's own doing, should temper expectations.

The current income tax is an economic burden. The transaction costs alone are staggering.

A Cato Institute study estimated that more than a million people are employed administering and complying with the income tax code. The Office of Management and Budget found that Americans spend more than 6 billion hours a year attempting to comply with it.

The current code also hinders productive economic activity, particularly capital formation. Marginal income tax rates are still too high, and dividend income is still subject to excessive double taxation.

The lodestar for tax reformers has long been lower rates on broader bases. The 1986 tax reform moved in that direction, limiting income exclusions and reducing the number of tax brackets to just two, 15 percent and 28 percent.

Since then, there have been more than 7,000 tax changes, with a proliferation of credits, deductions and additional tax brackets.

Even with the Bush tax cuts, the top marginal rate has crept back up to 35 percent.

In his after-election press conference, Bush enumerated his goals for tax reform: revenue-neutral, or raising as much money for the government, simpler and fairer.

He also seemed to indicate a desire to keep the current deductions for mortgage interest and charitable contributions.

There's not much room for reform within those constraints.

In 2002, the last tax year for which detailed information is available, aggregate adjusted gross income was just over $6 trillion. Deductions and exclusions to that totaled not quite a third of that, nearly $2 trillion. So, there's room to broaden the tax base.

Donate to JWR

But the deductions Bush seems to favor keeping - mortgage interest and charitable contributions - were about $480 billion. And if high-income earners are going to retain any ability to itemize deductions, then for equity reasons the standard deduction for non-itemizers probably has to be retained. That's another $480 billion.

So, nearly half the deductions are caught up in just those three categories.

Of the remainder, the lion's share is the deduction allowed for state and local income taxes, expanded recently to include sales taxes as an alternative. That amounts to a federal subsidy to high-tax states, and should be eliminated. But politically, it won't be easy.

Another way to broaden the tax base would be to eliminate tax credits. Credits total nearly $80 billion, about 10 percent of total tax liability.

But more than three-quarters of the money is in just two credits: the child credit, a favorite of social conservatives, the expansion of which was a central feature of the Bush tax cuts; and the Earned Income Tax Credit for low-income workers.

So, once any deductions or credits are accepted, the opportunity to broaden the base, as a practical matter, quickly narrows.

The revenue-neutral condition Bush has placed on tax reform is also highly constricting, given how progressive the federal income tax code has become.

According to the Treasury Department, the top 10 percent of income earners now pay 65 percent of all federal income taxes, although they make only 43 percent of the money. The bottom 50 percent pay just 4 percent of income taxes, although they make 14 percent of the money.

The Bush tax cuts, by giving a deeper percentage-rate reduction the lower the income, actually made the federal income tax more progressive.

As a result, if tax reform is to raise the same amount of money, a simpler, flatter tax code is likely to shift the burden to those making relatively less. Which, for many people, will fail the fairness test.

The current configuration of the income tax, aggravated by the structure of the Bush tax cuts, makes traditional reform politically difficult, particularly if constrained by revenue neutrality.

As a practical matter, fundamental tax reform probably now has to take the form of a consumption tax, or replacing the federal income tax with a national sales tax.

That's actually a better approach. A consumption tax is easier to administer and more conducive to productive economic activity. Equity issues can be handled through rebates, and there would be an increase in liberty if what you earned and how you earned it was none of the government's business.

But it's obviously a much more radical reform, one likely to occur only after a presidential candidate runs explicitly on it and wins. Which Bush, needless to say, did not do.

JWR contributor Robert Robb is a columnist for The Arizona Republic. Comment by clicking here.


11/14/04: Empowerment agenda reality check
10/13/04: And what tax rate should Americans making over $200,000 a year pay? Some pre-debate advice for the President
09/24/04: Too many of the wrong people have too much ability to influence public opinion too quickly?
09/20/04: Kerry asks good question about security costs
09/07/04: Right city, right message
08/30/04: Bush's key task: His reinvention as a true uniter
08/20/04: Bush's burdening the Middle Class
08/13/04: For prez to win, he must change his campaigning style
08/03/04: Missing in Beantown was a sense of the art of the possible
07/26/04: Kerry inflated agenda reveals he's failed to truly make the transition from legislator to presidential candidate
07/12/04: Edwards punctuates Kerry fantasies
07/06/04: Kerry ups the ante in bid for Latino vote
06/30/04: High Court gave administration limits
06/25/04: Parallel (political) universes
06/21/04: Al-Qaida-Iraq interaction strengthens case for war
06/02/04: Gas whiners don't believe in or trust markets
05/10/04: Border reforms fail on black-market issue
05/07/04: It wasn't Bush's recession nor Bush's recovery
04/28/04: Arizona to become test market on immigration as a political issue
04/23/04: Accusations that the Bush administration has been shredding civil liberties are hyperbolic
04/16/04: Learning the limits
04/14/04: Aug. 6 memo is not even a water pistol, much less a smoking gun
04/11/04: Once 9/11 Commission's political theater ends, we must debate real security issues
04/09/04: Fact checking Kerry's federal budget plans
04/08/04: Should the transfer of sovereignty in Iraq be delayed beyond the current deadline?
04/02/04: Kerry's tax epiphany makes some cents
03/31/04: What could have prevented 9/11
03/26/04: Knock off the high-stakes blame game
03/23/04: McCain a ‘straight talker’? Who is he kidding?
03/17/04: Bin Laden makes distinctions?
03/12/04: In the dangerous neighborhoods, cause for hope, if not yet optimism
03/01/04: Greenspan view scary, but Dems in denial

02/27/04: How not to achieve a mandate

© 2004, The Arizona Republic