Tough tax questions face the next president

One reason for falling corporate tax revenues is so called "corporate inversions." In these transactions a new foreign corporation, typically located in a no- or low-tax country, replaces a US company as the parent corporation of the business.

Another factor in the erosion of tax receipts from corporate America is inadequate IRS auditing activity. Face-to-face audits of corporations - where IRS auditors show up at the company's place of business - fell from 15 per 1,000 corporations in 1999 to 7 per 1,000 in 2003, according to data released this week by Syracuse University's Transactional Records Access Clearing House. "Government data show that major IRS programs to enforce the tax laws against businesses and corporations are continuing to slump," the study said.

All of the major issues facing the tax system add to ebbing confidence about its fairness, experts say.

"The next president has to work hard so that the public regains some confidence in the tax code," says Joel Friedman, senior fellow at the Center on Budget and Policy Priorities. "No one likes to pay taxes, but it goes down easier if you know your neighbor and the man across town are paying."

One key issue in the fairness debate is whether recent tax-law changes have biased the tax system against those whose income is derived largely from wages and salaries and toward those who get large dividend and capital-gains payments.

Bush ideas "like lifetime savings accounts and lower taxes on dividends and capital gains - all of that is taking the tax burden off of capital," notes Charles Davenport of Tax Notes.

Allan Sloan, a Newsweek columnist, argued this theory provocatively last week, saying Bush would make it harder for people starting up the economic ladder while showering rewards on the rich.

Bush and his economic team defend his tax plan as reducing the burden for all payers, and tax cuts on "capital" as spurring job creation and investment.

Beyond cosmic fairness questions, several tax cuts are set to expire at year end, including a higher child tax credit, relief from the so-called "marriage penalty," and an expansion of the number of people in the lowest (10 percent) bracket. "If they are not extended before a new president comes in, they will probably be a top issue," early in 2005, says Mr. Orszag.

Congress is also still wrestling with replacing a tax subsidy for US exports that the World Trade Organization ruled was illegal. Since March, retaliatory tariffs have been imposed by the European Union.

For all the tax issues facing the president in 2005, there is no guarantee that action will be forthcoming quickly. "History has shown we are capable of dealing with [such issues] unfortunately in a very incremental way," says Joel Friedman of the Center on Budget and Policy Priorities.

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