Tax Watchdogs Lukewarm to Tax Panel Proposals

Published December 1, 2005

Despite calling for a simplified tax system in a report issued November 1, President George W. Bush’s tax reform commission appears to have pleased few tax reform advocates. Numerous business organizations, such as the National Association of Home Builders and the American Council of Life Insurers, also expressed opposition to aspects of the recommendations. Many lawmakers responded lukewarmly or with open opposition.

“The newly released report of the President’s Panel on Federal Tax Reform represents a big step toward simplifying the current system and moving away from taxing income to a consumption-based system,” said Tax Foundation President Scott A. Hodge in a statement November 1. “However, these plans do fall far short of the complete overhaul of the tax system that most reform advocates had hoped for.”

Should Be Starting Point

The Heritage Foundation, another group that has long advocated changes to America’s tax system, responded with some disappointment: “While the Panel’s recommendations all point in the right direction, the Panel unfortunately backed away from more sweeping reforms. Lawmakers should use the Panel’s report as a starting point on the way to a more simple and fair tax system, such as the flat tax.”

At the Free Enterprise Fund, executive director E. O’Brien Murray issued a statement saying, “Their report includes a number of good ideas that deserve a larger hearing and serious consideration as the Treasury Department moves ahead with a legislative vehicle. That said, we remain concerned that the panel did not do more in the way of recommendations to eliminate the taxes on savings and investment–which are really taxes on hard work and success–and that they did not recommend a single, simple flat rate for all Americans.”

At Americans for Fair Taxation, which advocates doing away with all federal income taxes–including personal income taxes, Social Security and Medicare taxes, capital gains taxes, and corporate taxes–members are deeply disappointed, said Tom Wright, executive director of, the organization’s Web site. Backers of the Fair Tax advocate a single-rate federal retail sales tax to replace existing federal taxes.

Dismissed as ‘Tinkering’

“You could sum it up in one word: tinkering,” Wright said. “Or you could sum it up in three words: same old tinkering.”

Wright said the proposals are like previous tax reforms “that have absolutely no inherent immunity to the special interests that have taken other flat taxes and made them unflat.” He noted how tax simplification in 1986 soon became “tax complication” as Congress began loading the tax code with favors to interest groups. Wright said the president’s panelists “have overlooked the fundamental invasion of civil liberties and erosion of civil liberties inherent in any income tax system. The Internal Revenue Service is the world’s largest surveillance agency.”

Dan Mastromarco, a tax attorney in Annapolis, Maryland, said the tax panel “saw itself as a shadow congressional mark-up committee. If that’s the best they can do, we might as well keep what we already have.

“This plan is a lobbyist’s dream,” Mastromarco continued. “Over 500 bills were introduced in the first month after the 1986 tax reform act was signed. I don’t know how these people could have failed to understand the history they helped write. God help us when this gets to Congress.”

Report Offers Two Options

The report proposes either a simplified income tax system or a hybrid income tax-consumption tax system that would increase incentives for savings by cutting taxes on capital income.

Both plans call for eliminating or reducing most major income tax deductions and lowering tax rates for individuals and businesses. Among other things, the home mortgage interest deduction would be turned into a limited tax credit, and the amount of health insurance a company could provide to employees tax-free would be limited.

According to Bloomberg News on November 1, “Al Mansell, president of the Washington-based National Association of Realtors, which represents 1 million real estate agents and whose political action committee gave more money to lawmakers in 2004 than any other group, said reducing tax incentives for homeownership would cost the typical homeowner up to $30,000 in housing equity.”

But Sheila Crowley, president of the National Low Income Housing Coalition, told Bloomberg lower-income homeowners would benefit if the mortgage deduction were replaced with a 15 percent credit.

Marc Lackritz, president of the New York-based Securities Industry Association, told Bloomberg eliminating taxes on dividends and cutting capital gains rates would help boost economic growth.

Democrats Lead Opposition

Sen. Chuck Schumer (D-NY) slammed the report, particularly because it recommends eliminating federal tax deductions for state and local taxes. New York has notoriously high local and state taxes, and Schumer told the Associated Press, “It’s hard to conceive of something that could hurt New York more than the elimination of state and local tax deductibility.”

House Minority Leader Nancy Pelosi (D-CA) issued a statement November 1 in which she called the report “A Trojan horse using so-called simplification to cut taxes for the wealthy while increasing taxes for middle-class families.”

Pelosi was particularly upset at the proposals to limit the mortgage-interest and health insurance deductions and end the deduction for state and local taxes.

“Each of these would be a severe blow to the middle class,” Pelosi said.

Treasury Secretary John Snow told reporters he considers the report “a starting place.” Snow will make recommendations to Bush before anything is submitted to Congress.

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

For more information …

The report of the President’s Advisory Panel on Federal Tax Reform may be viewed at the panel’s Web site at