Attention Shifts Toward Simplification of Tax Code
Thursday, June 9, 2005
With progress on Social Security slowing to a crawl, the House Ways and Means Committee turned its attention yesterday to the subject considered to be committee Chairman Bill Thomas's true passion: an overhaul of the tax code.
Thomas (R-Calif.) gave only subtle hints of his intentions at the first hearing on comprehensive tax changes in a decade. For instance, he spoke favorably about testimony that described a flat tax as potentially progressive and little different in economic effect from a value-added tax. Value-added taxes -- widely in use in Europe -- levy sales taxes on each level of a product's production.
Economic policymakers were intrigued less by the contents of the hearing than the fact that Thomas held it. President Bush's Advisory Panel on Federal Tax Reform is not due to release its recommendations until July 31, and White House officials are expected to put those recommendations on the back burner until Congress finishes with a Social Security overhaul.
But official Washington may already be looking past Social Security. The American Enterprise Institute held a panel discussion on tax reform on Monday. Ways and Means turned to the issue yesterday. And R. Glenn Hubbard, the former chairman of Bush's Council of Economic Advisers, will speak at a tax reform luncheon on Friday at the accounting giant PricewaterhouseCoopers International Ltd.
"It's pretty obvious Social Security is on its last legs," said Bruce Bartlett, a conservative economist with the National Center for Policy Analysis. Tax reform "will be an excuse to change the emphasis" on Capitol Hill.
Advocates of Bush's Social Security restructuring say Thomas is perfectly capable of pursuing both issues at once, but some Thomas allies suggested the chairman would make good on his ideas to merge the two issues into one huge legislative package. Kevin Hassett, the economic policy director at AEI, said Thomas could produce a bill that would create personal investment accounts financed outside of the Social Security system, then use a tax change package to collapse the myriad existing savings incentives such as 401(k) plans and IRAs into the new accounts.
"I think it's the only way it works politically," Hassett said.
Congressional Democrats have also suggested they could get behind Thomas on a push to dramatically simplify the tax code. Rep. Rahm Emanuel (D-Ill.), chairman of the Democratic Congressional Campaign Committee, proposed collapsing five existing educational tax breaks into a single, $3,000 tuition tax credit; unifying the earned-income credit, the child credit and the dependent-care tax credit; and drafting a single pension plan out of the 16 different tax incentives that now encourage retirement savings.
"I think tax reform is a winning issue for Democrats," Emanuel said. "There's more momentum out there for getting something done on the tax code than there is on what the president wants to do with Social Security."
But yesterday's hearing made it clear how difficult simplifying the tax code will be. Five economists, conservative and liberal, laid out the problems with a tax code that one of them, Joel B. Slemrod of the University of Michigan, said costs $125 billion and 3.2 billion hours a year to comply with. They pleaded for dramatic changes that would strip out targeted tax incentives, bewildering tax rate changes and quirks that distort economic behavior.
Not all committee members were convinced, however. Rep. Benjamin L. Cardin (D-Md.) cautioned against tampering with tax incentives that encourage savings. Rep. Wally Herger (R-Calif.) expressed adamant opposition to a VAT, which he said would be hidden from view and could be steadily raised by politicians without fear of voter revolt.
And Rep. Nancy L. Johnson (R-Conn.), a candidate to replace Thomas as chairman after he reaches his term limit next year, stood up for tax incentives maligned by some as overly complex but designed by Congress to influence behavior -- such as building low-income housing or providing health care for children. Many of those incentives were authored by the committee now being asked to eliminate them.
"I just want to put my marker down," Johnson told the hearing witnesses. "You've got to have better information for me to convince me that tax credits aren't powerful or important in structuring a society."