Bush Will Likely Opt For Gradual Tax Reform, Says Goldman Sachs

by Leroy Baker, Tax-News.com, New York

15 December 2004

The Bush administration’s plans for tax reform will likely result in small and gradual changes to simplify the tax code rather than politically controversial root and branch reform, according to investment bank Goldman Sachs.

In an economic commentary published last week, the bank predicted that the White House will be deterred from radical measures such as a flat tax or a consumption tax because of a lack of political support for such measures and constraints imposed by the federal deficit.

Instead, the paper written by Goldman economist Andrew Tilton forecasts that reform will focus on eliminating certain deductions and preferences “in order to free up revenue for lower marginal income tax rates."

Tilton also envisaged that these reforms could eliminate the deduction for state and local taxes, which he noted would hurt the “high tax coastal states” such as New York and California. However, this measure would have “fewer electoral consequences” for the GOP.

If the administration chooses to pursue such a course of action, the reforms would also mitigate the growing reach of the Alternative Minimum Tax, as the deductibility of state and local taxes is one of the major reasons why more households are facing AMT, he observed.

More radical reform is likely to be avoided because it would be a “zero sum game” with losers as well as winners, and the more sweeping the reform, “the more political resistance it will face from groups on the losing end," Tilton argued.

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