The New (Non) Tax Reform
By John D. Turner
8 Nov 2005

Well, the results from the President’s Advisory Panel on Federal Tax Reform are in, and what do we have from the 10 months of deliberation? More of the same old stuff we always get; nothing new.

The panel proposed two options, both of which leave in place the current dysfunctional IRS system. Both reduce the current number of tax brackets and eliminate the Alternative Minimum Tax (AMT), a monster that was created to ensure that the top 1% of taxpayers pay their “fair share”, but which, due to its not being indexed for inflation, is reaching further and further down into the middle class each year. And they “pay” for these “cuts” by eliminating still more of the few tax deductions we have left.

We have been here before folks. Under President Reagan, the tax code was reduced to two brackets; 15% and 25%. We “paid” for those by giving up tax deductions. Now here we are 20 years later, the number of brackets has grown to six, and we are being asked to give up still more deductions to get the number back down to three or four (depending on the option). At this rate, we won’t have any deductions at all before long.

And what are the deductions we will be losing? Deductibility of state and local taxes, the tax-free health insurance supplied by employers, and most importantly, capping of home mortgage deductions. Of course, the latter will only affect those rich “fat-cats” with mortgages exceeding the maximum mortgage the Federal Housing Administration will insure. This amount varies across the country, but averages $244,000 nation-wide.

That may seem like a lot to folks living here in San Antonio (although there are a significant number of homes here that exceed that amount), but to people living in high-cost areas, such as California, it won’t cover the average mortgage. It isn’t that everyone is rich in California, it’s that everything costs a lot more.

And what do we get for it? A reduction in the number of brackets, a slight decrease in rates, and no guarantee it won’t change tomorrow. In fact, based on history, you can guarantee that it will change. And don’t forget, the Bush tax cuts, enacted into law several years ago, expire in 2010. At that point, our taxes will jump dramatically, and our deductions will have been pared back significantly. Can you say “major tax increase”?

It was expected that the President’s Advisory Panel would recommend as one of its options, the adoption of an alternative taxing system, such as a flat tax or national sales tax. Such a framework would have greatly simplified our tax code, saving billions of dollars each year in tax-related costs, and reducing the overhead burden on the taxpayer to near zero. Unfortunately, such was not the case. The Byzantine Labyrinth that is our tax code will remain unchanged. “Tax simplification”, it seems, means simplifying our deductions, and little else.

Eliminating the punitive AMT is good. It needs to be done. But its elimination would have been part of any new tax framework in any event. And the cost of its elimination would have been born by the reduction in cost of the taxing structure as a whole, instead of being “paid for” by eliminating most of the few deductions many taxpayers have left and leaving the monster in place.

It is true that both the proposed Flat Tax and the Fair Tax (National Sales Tax) also eliminate deductions. However they also eliminate the tax code itself, leading to a myriad of savings benefiting the economy and the taxpayer. Among other things, either could be the biggest “Campaign Finance Reform” in the history of the country. The tax code is a huge target for special interest lobbyists who spend large sums each year seeking to sway influential congresscritters to vote for tax policy benefiting their employers. This would disappear under either of the two proposals, Flat Tax or Fair Tax.

There are a number of flat tax and national sales tax proposals floating around, each differing a bit on actual implementation. The most well know are probably Steve Forbes flat tax proposal, presented in his recent book Flat Tax Revolution: Using a Postcard to Abolish the IRS, and Congressman John Linder’s version of the national sales tax, popularized by Neil Boortz in his book The FairTax Book. Both are excellent reads and present compelling arguments for their positions. My personal opinion is that the Fair Tax has an edge, but may be a bit harder to implement, as it would require a constitutional amendment repealing the 16th amendment, so that we don’t end up with both an income tax and a national sales tax. A national debate on either as a replacement to our current system would be welcome.

Unfortunately, the President’s Advisory Panel on Federal Tax Reform doesn’t present us with that option. Instead, it ties the federal tax yoke a bit tighter around the necks of the citizenry, ensuring that the current crop of vested interests and power brokers will continue to have plenty of tax sheep to fleece.

The President does not have to follow their recommendations. He has in the past supported abolishing the current federal tax structure, and replacing it with a flat tax or national sales tax. This is an opportunity for him to be bold and lead. Unfortunately it is unlikely that he will do so here.

The President’s poll numbers are in the tank, as the mainstream media takes great delight in telling us at every opportunity. We are fighting an important, but increasingly unpopular war in Iraq. His initiative on reforming Social Security seems to have died stillborn. Top aides in his administration are under fire for various alleged misdeeds. His ambitious space initiative, intended to send us back to the moon appears stalled, as we can’t even seem to get back into orbit (and there appears to be little enthusiasm for it anyway). The midterm elections are fast approaching. And while the President cannot be re-elected, his party has no desire to lose the grip on power they have achieved, even if they seem to be clueless on what to do now that they have attained it.

In this environment, it seems unlikely that the President will be able to muster any support at all for another grand initiative that would require vast amounts of political capital that he simply doesn’t have. It would, in effect, require the Congress to eviscerate itself when it comes to the power embodied in the current tax code, and the President simply doesn’t have the leverage to make it stick at this time, particularly with elections coming up. For congresscritters, there is too much PAC money at stake, and too much of a threat that if they were to support such an effort, that PAC money might go instead to their opponents.

So, once again, we see that words mean things; it is important to get the definitions down first, so that when you both say “reform”, you can be certain that you are talking about exactly the same thing. Although Republicans have been saying for years that tax reform is high on their list of priorities, when they have the opportunity for real reform, having control of both the Executive and Legislative branches of government, they balk when it comes to change. Instead of real reform, they settle for reshuffling the deck chairs on the Titanic.

Reform; they keep using that word. I don’t think they think it means what we think it means.