George W. Bush's chances of engaging the country with a dynamic second-term initiative were sabotaged this week. His own tax reform advisory panel reported two plans exceeding the worst expectations. Not only would they be dead on arrival if actually sent to Congress, but they probably stifle Bush's hopes for seriously reshaping how Americans are taxed.
The President's Advisory Panel on Federal Tax Reform, created 10 months ago, released its report Tuesday, and it turned out to have precious little to do with what Republicans think of as reform. Instead of a low flat tax, it proposes a high graduated tax. It retains pretty much intact the dysfunctional Internal Revenue Code. It does not entertain the slightest possibility of a national sales tax.
Having named a commission to make recommendations instead of using his own administration to devise a plan, Bush faces this dilemma: He can either buy into a reform that is going nowhere or, alternatively, disregard his panel's work and start from scratch. It is unlikely that the Harvard Business School graduate who now occupies the Oval Office would take the unconventional latter approach.
What the panel came up with is hard to believe. The two options propose four and three tax brackets, respectively, with top rates of 33 percent and 30 percent, down from the present 35 percent. Even John Maynard Keynes, no supply-sider, said 25 percent is the highest acceptable rate. The measly rate reductions were added belatedly by the panel, which intended to retain the 35 percent bracket until it found its plan generated enough extra money to make cuts and still keep the package revenue-neutral, as the president requested.
The extra revenue results from repealing deductions for state and local taxes, ending tax-free health insurance supplied by employers, and capping home mortgage interest deductions. While largely leaving alone the revenue code's maze, the panel rips into three of the most popular tax benefits.
This strange product results from the fact that the panel, instead of recommending a new tax framework, concentrated on one specific -- and expensive -- goal: to eliminate the alternative minimum tax (AMT), which is forecast to raise the taxes of 21 million people in 2006 and 52 million in 2015. When the 1986 tax reform failed to clean up the code and many people still paid no taxes, the AMT was instituted.
Thanks to inflation, the AMT covers so many upper-middle-income taxpayers that its elimination has become one tax cut favored by Democrats. But why would a Republican president's commission lock into a Democratic priority? Because the Bush panel's dominant figure is its vice chairman, former senator John Breaux of Louisiana, a Democrat with a reputation for compromise but a record of partisan loyalty.
Breaux's Republican counterpart on the panel is former senator Connie Mack of Florida, who ran with supply-siders on Capitol Hill but now seems most interested in cancer research. Hopes that the panel's membership would recommend real tax reform plunged when Bush appointed a third legislator: 77-year-old former representative William Frenzel of Minnesota, who, as the House Budget Committee's ranking Republican in the 1980s, was the bane of supply-siders.
Most disheartening for reformers about the presidential panel is what it omits. It does not include the innovative, daring plan of Sen. Jim DeMint of South Carolina for an 8.5 percent retail sales tax and an 8.5 percent business transfer tax on companies. Yet, Bush has declared that a sales tax is an "interesting idea that we ought to explore seriously."
"Rather than giving the president a sales tax option," said Lawrence A. Hunter, chief economist of the Free Enterprise Fund, "the panel took it upon itself to decide for the president, limiting his options. That isn't what the panel was supposed to do." DeMint's plan, of course, would eliminate the AMT, as would any far-reaching tax reform.
When Republicans assumed control of Congress in 1994, the party's leaders assured me that tax reform would be high on their agenda. In 11 years, however, Republicans have not begun to resolve the conflict between a flat tax and a sales tax. Bush ignored the issue as president until this year and then named a commission instead of drafting a proposal. What emerged this week suggests that the president and the Republicans have squandered a precious opportunity.
(c) 2005 Creators Syndicate Inc.