Bush Tax Reform Agenda Begins to Take Shape

Published December 1, 2004

President George W. Bush has signaled a willingness to spend political capital to enact changes to U.S. tax policy during his second term in office, though what those changes might be remains to be seen, according to various analysts.

Among the ideas vying for Bush’s support are elimination of many of the tax preferences in the federal income tax code, a flat tax of less than 20 percent to replace the current four tax brackets, and creation of a national sales tax to replace the income tax.

During the presidential campaign, Bush expressed interest in changing the tax code provided that deductions for charitable giving and mortgage deductions are preserved and that changes be “revenue neutral.”

On November 4, two days after winning reelection, Bush told reporters any tax changes would have to be “fair.” He did not elaborate on what “fair” means.

No Specific Proposals Yet

These comments and others have led Bruce Bartlett, a senior fellow at the National Center for Policy Analysis (NCPA), to speculate Bush wants to reform the existing income tax system rather than scrap it. Bartlett served as a U.S. Treasury official in the Reagan administration.

Bartlett said if Bush were keenly interested in moving to a national sales tax or some other vehicle for eliminating the income tax, the president would not have mentioned protecting charitable and mortgage deductions. Bartlett also said the comment about fairness suggests Bush may oppose a flat tax.

Bartlett spelled out his thinking in an article posted November 10 on the NCPA Web site (http://www.ncpa.org/edo/bb/2004/20041110bb.htm).

“Mr. Bush has said that his two highest domestic priorities are tax reform and Social Security reform,” Bartlett wrote. “Unfortunately, he has said very little about what he means in these areas. Consequently, someone is going to have to be assigned to draft a specific proposal–or at least detailed guidelines–before action in Congress can proceed.”

Bartlett also noted, “On both tax reform and Social Security, the budgetary implications of whatever is done will be a central consideration, especially so since the budget deficit is a problem that Mr. Bush has also promised to address.”

Grover Norquist, president of Americans for Tax Reform, said he believes “the Bush administration, on tax reform, is where it was four years ago with Social Security reform. Bush did not ask for a plan, but the right to have a reasonable discussion of the pros and cons of Social Security reforms. That’s the approach with tax reform.”

The president is assembling a tax reform commission to study ideas, a process Norquist expects to take at least 18 months. As those discussions go on, various changes in the tax code are likely to occur, he said.

“While this is going on, we’ll have the ability to abolish the death tax,” Norquist said. “I think we’ll see one tax cut each year for the next four years. Each cut moves us toward reform. I know we can get rid of the death tax and get LSAs [lifetime savings accounts] and RSAs [retirement savings accounts].”

Social Security Reform in View

Norquist said he views Social Security reform as a major part of tax reform, arguing that if Bush pushes for a program that allows people to put half of their Social Security tax money into personal savings accounts, “that is cutting in half the largest tax most people pay. That would probably be the most substantive cut. For people who ask why is the administration doing Social Security reform before tax reform, that kind of Social Security reform is addressing the most expensive tax around and is fundamental tax reform.”

Norquist also said, “For those who like sales taxes, until we move Social Security off the table by turning it into a forced savings program, we’ll never be able to shift onto a retail sales tax.” That is because the sales tax burden would need to be so high to cover Social Security’s costs that “people would work as hard to avoid the sales tax as they do the income tax,” he said.

Bill Gale, codirector of the Tax Policy Center at The Brookings Institution, said he doubts any “fundamental” tax reform will occur in 2005, largely because the work of the tax reform commission will not be completed.

However, Gale said he believes less-ambitious tax reform activity will continue early in Bush’s second term.

“I think we will see three things,” Gale said. “First, a push to make the [previous] tax cuts permanent. Second, and equally important, is they will look for ways to do it so that the cuts don’t have to be paid for. They will try to change the budget rules. That’s an under-the-radar thing to watch out for, because that would be an enormous liability. Third, they’ll push for added incentives for tax-preferred savings.”

Flattening a Possibility

Tim Kane, an economist at The Heritage Foundation, told Chicago Tribune Washington correspondent William Neikirk he believes Bush might strive to make the income tax system “flatter” by closing loopholes and reducing the number of tax brackets from four to two.

“You can get a pseudo-flat tax by reforming and simplifying the income tax,” Kane told Neikirk. “It’s doubtful you can get to a single rate.”

Neikirk also spoke with Robert Reischauer, president of the Urban Institute and a former director of the Congressional Budget Office, who said he doubts any major tax reform will pass Congress.

“Tax reform is terribly difficult to accomplish because it involves not only very important philosophical issues, but also because it involves huge amounts of redistribution of income,” Reischauer told Neikirk. “Without money to offset the losses that some interests will experience, tax reform becomes a virtual impossibility.”

Steve Stanek ([email protected]) is managing editor of Budget and Tax News.