US Tax Panel Now Confabulating

by Mike Godfrey, Tax-News.com, Washington

14 June 2005

President Bush's Advisory Panel on Federal Tax Reform has finished taking evidence and has now begun to formulate its conclusions from the mass of input it has received. It's due to report not later than July 31.

"Our goal is to provide tax reform options that are simpler, fairer, and pro-growth," said Senator John Breaux, Vice-Chairman of the Panel. The President's Advisory Panel on Federal Tax Reform was established by President Bush on January 7, 2005 . The Advisory Panel will submit to the Secretary of the Treasury a report containing revenue neutral policy options for reforming the Federal Internal Revenue Code which should:

• simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws;
• share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and
• promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.

Major ideas submitted to the Panel include a switch from income to consumption taxation, and the possibility of a flat income tax (as implemented in a number of new member states of the European Union). Under a sample plan drawn up by Michael Graetz, a Yale Law School professor, consumers would pay a 13% to 14% value-added tax on their purchases. Individuals earning less than $50,000 and families making under $100,000 no longer would pay income taxes under such a plan. Those still paying income taxes would get a simplified system and a top tax rate of 25%

Lobby group Americans for Fair Taxation wants a flat consumption tax levied at 23% on all new goods sold at the retail
level to end users. This would be in lieu of all payroll taxes, including the income tax, achieved by repealing the 16th amendment. There is no "exemption" for the poor in FairTax, rather a "prebate" of tax to everyone in the amount one living at the poverty level would have to spend on the new tax. Thus the poor would pay no tax, and everyone else has the same advantage unless they choose to spend more. Everyone will keep more of their earnings, and with the removal of embedded payroll tax costs, the price of retail goods would fall nearly enough to fully offset the retail level consumption tax. Used goods would not be taxed.

In April, the Panel said:

'During our examination of the existing system, several themes emerged from the public comments and testimony. These themes will guide our efforts as we consider options for reform:

• We have lost sight of the fact that the fundamental purpose of our tax system is to raise revenues to fund government.
• Tax provisions favoring one activity over another or providing targeted tax benefits to a limited number of taxpayers create complexity and instability, impose large compliance costs and can lead to an inefficient use of resources. A rational system would favor a broad tax base, providing special treatment only where it can be persuasively demonstrated that the effect of a deduction, exclusion, or credit justifies higher taxes paid by all taxpayers.
• The complex and unpredictable influences of the current tax system on how families and businesses arrange their affairs distorts economic decisions, leads to an inefficient allocation of resources, and hinders economic growth.
• The complexity of our tax code breeds a perception of unfairness and creates opportunities for manipulation of the rules to reduce tax. The profound lack of transparency means that individuals and businesses cannot easily understand their own tax obligations or be confident that their neighbors or competitors are paying their fair share.
• The tax system is both unstable and unpredictable. Frequent changes in the tax code, which often add to or undo previous policies, as well as the enactment of temporary provisions, result in uncertainty for businesses and households. This volatility is harmful to economic development and creates additional compliance costs.
• The objectives of simplicity, fairness, and economic growth are interrelated and, at times, may be at odds with each other. Policymakers routinely make choices among these competing objectives, and, in the end, simplification is almost always sacrificed. Although these objectives at times are in tension, meaningful reform can deliver a system that is simpler, fairer, and more growth oriented than our existing tax code.

Testifying before the panel, Utah state Tax Commissioner R. Bruce Johnson, representing the Multistate Tax Commission, noted that state and federal tax systems are deeply intertwined, as most states use federal adjusted gross income to determine state income tax liability. What's more, state and local governments receive about one third of their revenues from sales tax, two issues which Johnson observed will pose serious difficulties in the formulation of a potential national sales tax. "If the federal government were to adopt a Value Added Tax (VAT) or a National Retail Sales Tax, simplification of the federal tax system may be achieved at the expense of greater overall complexity," he remarked.

It is to be hoped that the Panel will not just come up with a series of 'simplifications' which will actually make the Tax Code more complicated. Even if the Panel does make far-reaching recommendations, however, there is no radical simplification which doesn't trample on someone's special interest; and in America's introspective, election-obsessed legislature, that is too often a recipe for inaction.

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