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Allan Sloan

From Tax 'Reform' Panel, Expect a Foregone Conclusion

By Allan Sloan
Tuesday, April 12, 2005; Page E03

Now that April 15th is almost here, you're likely to be either licking your wounds from filling out tax returns or obsessing about the imminence of tax day. Maybe even both. You may have gotten all sorts of bad news, such as losing tons of deductions to the alternative minimum tax or discovering that if you work in one state and live in another, you've been taxed coming and going. If you're one of the brave souls who do taxes by hand, rather than using a software program, you may have discovered that the instructions have been written in no known language. Certainly not in any language resembling English.

In this season of tax despair, it's tempting to believe that some of the "reform" proposals kicking around will help forestall future tax nightmares. But reform no longer means "making things better" -- if it ever did. In these days of spin and packaging, reform means "doing what I want to do." A case in point: the President's Advisory Panel on Federal Tax Reform created by George W. Bush in January. You'd like to believe that this commission, which is currently holding hearings and plans to file a report by July, will offer ways to make the tax system less unfair than the mess we've currently got. But look out.

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If you decode Bush's executive order creating the commission -- it's on the commission's Web site, www.taxreformpanel.gov -- you can pretty much guess what the panel will propose. It's not going to design a tax return that you can fill out without software or a master's degree in taxation. Rather, it seems all but certain to lend Bush's existing agenda the imprimatur of the word reform.

Why am I so skeptical -- some would say cynical -- about the tax "reform" commission, which has respectable members? Because I've seen the results of a similar outfit, Bush's Commission to Strengthen Social Security. Rather than asking that commission to pick the best possible Social Security system, Bush required it to advocate for private accounts and to avoid increasing Social Security taxes. This meant that the commission was predestined to propose sharp cuts in future benefits, and massive borrowing to fund private accounts.

The report languished for years -- it came out in December 2001, after the Sept. 11 attacks had rocked the country and Enron's bankruptcy had discredited the stock market. Bush dusted it off after last year's election and declared it the starting point for Social Security "reform." But its conclusions, of course, had been pretty much determined by the conditions that Bush imposed on it.

Now, let's look at Bush's tax "reform" commission. Instead of letting the commission propose the best possible tax system, Bush has hemmed it in. It has been ordered to make investments more attractive -- as if investment income weren't already favored enough. It's supposed to keep homeownership and charitable tax deductions tax-favored. Its proposals are supposed to be revenue-neutral, meaning that any tax cuts must be offset by new revenues.

So I'll bet my (nonexistent) refund that the tax "reform" proposals will go something like this. Leave Bush's existing tax cuts in place. Eliminate the estate tax. Eliminate some or all of the remaining taxes on income from investments. Eliminate or pare back the alternative minimum tax (AMT). Make up for these cuts by adopting something like a broad-based national sales tax or value-added tax. Eliminate or pare deductions for state and local taxes, which the AMT has begun to do indirectly.

The AMT mostly affects people in high-tax (read: Democratic-leaning) states but is spreading to taxpayers throughout the country. Even though it's clawing back an increasing proportion of the Bush tax cuts, the president has never proposed cutting it. Clearly, an AMT fix is being held hostage to make a national sales tax or value-added tax more palatable.

This "reform" package would be part of Bush's unstated but clear goal of turning the income tax into a tax on wages only, and making the country even friendlier for inherited wealth and for people with lots of income from investments. As for wage slaves who are trying to accumulate wealth, good luck. They'll pay tax not only on the salary they earn, but also on what they spend. A national sales or value-added tax would fall disproportionately on lower-income people who spend everything (or almost everything) they make. But there's nothing in Bush's instructions to the commission saying that would be bad.

I ran my analysis past a spokeswoman for the commission, who politely declined to comment. When the commission reports in July, we'll see how close I've come. And on that note, many happy returns to you and yours.

Allan Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.


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