"Bush expected to press for overhaul of tax code
Replacing system politically difficult
By William Neikirk
Tribune senior correspondent
Published November 7, 2004
WASHINGTON -- President Bush has signaled he wants to produce a major overhaul of the federal tax code in his second term rather than just tinkering around the edges--an ambition likely to be extremely challenging.
Experts see many political and practical difficulties if Bush takes a more radical approach to tax reform by adopting a national sales tax or a single "flat" income tax rate, even though the president has ruled out nothing as he prepares to name a tax commission to make recommendations.
But many analysts believe that, at the very least, any Bush rewriting of the tax code is likely to exempt significantly more of the savings of Americans from taxation. To many conservatives, this would be a step in the right direction but does not go far enough.
Conservatives are divided into three main camps. One group supports a national sales tax of more than 20 percent to replace the income tax. A second favors one income tax rate of less than 20 percent to replace the current four tax brackets, and a third prefers reforming the current income-tax system by ending many tax preferences and reducing overall tax rates.
Major tax overhaul seems unlikely, some analysts say, noting that Congress and the two parties are divided on the question and that true reform would remove precious tax breaks for many powerful interests that worked hard to get them.
In addition, many Democrats and moderate Republicans oppose changing the essential philosophy of the income tax system: the more you make, the higher your tax rate.
At this point, the shape of a tax-overhaul plan is nothing more than guesswork because Bush is far from settling on any package. But he has said he wants an overhaul that brings in the same amount of revenue as the current system and one that protects the charitable and mortgage interest deductions.
By mentioning these two deductions, said economist Bruce Bartlett, a Treasury official in the Reagan administration, one can "read between the lines" and conclude that Bush would prefer retaining a much-reformed income tax system, because both are deductions from the income tax.
As part of his effort to foster an "ownership society," Bush has proposed more tax-free savings accounts that would enable Americans to park significant sums of money tax-free.
Tim Kane, an economist at the Heritage Foundation, a conservative think tank, said he believed "tax reform is real, and it's going to happen." But he noted that the president will face major challenges in getting it through Congress, even one dominated by Republicans.
Ideas for current system
Instead of a single tax rate on all income, Kane said, Bush could make the tax system "flatter" by closing many loopholes and dropping the number of brackets from four to perhaps two as President Ronald Reagan did in 1986. At the same time, new tax breaks would be proposed for savings, such as more tax-free savings accounts.
"You can get a pseudo-flat tax by reforming and simplifying the income tax," Kane said. "It's doubtful you can get to a single rate."
Many members of Congress are "obsessed with this idea of progressivity," he added, referring to the fact that tax rates rise as income rises.
Nonetheless, Kane and other conservatives would prefer that Bush be bold and innovative in overhauling the tax system. Kane said he hoped the president would come up with a novel reform idea that would also eliminate the tax that employers and employees pay for Social Security.
Several analysts said that if Bush is to be successful, he will have to reach out to Democrats, in much the same way Reagan did in 1986, when Chicago's Rep. Dan Rostenkowski, a Democrat who was chairman of the House Ways and Means Committee, became a major supporter of tax reform.
At the moment, there appears to be no bipartisan support for conservative-style tax reform, such as a flat tax or a national sales tax, both of which are seen by liberals as regressive taxes that would hit lower-income groups the hardest.
Bush appeared to be distancing himself somewhat from the flat tax or sales tax ideas when he told reporters on Thursday that any tax changes would have to be "fair." This statement appeared to indicate he favored retaining a system that has higher tax rates for higher incomes, the progressive income tax. Bartlett said the 1986 tax-reform effort was enormously difficult and required several years of groundwork before Congress decided to pass it.
"Unfortunately, we're at ground zero right now," he said.
Edward Maydew, accounting professor and director of the University of North Carolina's Tax Center, said Bush in his first term signaled that he wants to tilt the tax system more toward taxing consumption. Lower taxes on dividends and capital gains are prime examples, he said.
When asked if Bush would do away with the current income tax system, Maydew said, "I wouldn't bet on it, but I would hope on it."
Robert Reischauer, president of the Urban Institute and a former director of the Congressional Budget Office, said he doubted any tax reform could pass in Congress.
"Tax reform is terribly difficult to accomplish because it involves not only very important philosophical issues, but also because it involves huge amounts of redistribution of income," he said. "Without money to offset the losses that some interests will experience, tax reform becomes a virtual impossibility."
But conservatives are upbeat about the chances for tax overhaul, and they say that, contrary to the concerns of liberals, conservative plans can be tweaked so that low-income Americans pay little or no tax.
House Speaker Dennis Hastert (R-Ill.) is an avid supporter of a European-style national sales tax and wants Congress to have hearings on it. Several House GOP members are backing a sales tax. Rep. Jim DeMint (R-S.C.), who supports a national sales tax, was elected to the Senate on Tuesday.
Tom Wright, executive director of Fairtax.org, a group pushing a national retail sales tax, said he believed the president "is going to listen very carefully to his advisers, not all of whom are totally on board with the [national sales tax]. We are going to do everything in our power to influence that."
23% sales tax proposed
The organization proposes a national sales tax of 23 percent. Wright said that the income tax would be jettisoned, along with Social Security payroll taxes, and the poor would be exempted from paying the levy.
Other analysts believe that the sales tax rate would have to be much higher than 23 percent, but Wright insisted the sales tax would bring in enough money to replace the income tax and payroll taxes.
Wright said the flat income tax, pushed by such conservatives as former House Majority Leader Dick Armey (R-Texas) and former Rep. Jack Kemp (R-N.Y.), is dead.
"There is no grass-roots support for the flat tax," he said.
But Stephen Moore, president of a political action group called the Club for Growth, which supports conservative candidates, said he believes Bush is "very likely to adopt a really bold restructuring of the tax code" with a flat income tax.
He said those who support the national sales tax have a practical problem: repealing the income tax, which was approved with passage of the 16th Amendment to the Constitution. "
I, for one, would have liked this mentioned before he won the election...but theres no way a flat tax, unless the republicans had 60 seats, that they could get that through.
