Tough-Love Tax Reform?
When the problem is thorny and the potential solutions unpleasant, Washington often forms a commission to deliver difficult news to voters.Skip to next paragraph
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The latest example of that tradition is the president's bipartisan Advisory Panel on Federal Tax Reform. Few issues are tougher and few potential remedies more unpleasant than those facing the nation's complex tax system.
Treasury Secretary John Snow says President Bush established the commission because he's committed to "real tax reform, to something more than just moving the boxes around."
The panel will have to tackle a host of tough tax issues in a report due by July 31. One of them is designing a tax system that will allow the government to shore up Medicare and Medicaid - whose financial problems are even more pressing than those facing Social Security.
At the very least, the panel needs to spell out a way to fix the Alternative Minimum Tax. The AMT dates to 1969 and was conceived as a way to ensure wealthy individuals did not use excessive deductions to escape paying any federal income tax.
The income threshold for being subject to the AMT was not indexed for inflation, so it's affecting a rapidly growing number of middle- and upper-income families. This April 15 some 3.8 million taxpayers will have to pay the AMT. Unless Congress acts, that number is projected to soar to 20.5 million by next year. By 2009 revenues from the AMT could be higher than those from the normal income tax. Reducing that massive flow explains why fixing the AMT will be so tricky.
President Bush has called for any tax reform to be "revenue neutral," which means it would take in neither more nor less than the current system. But the commission's report is likely to show how hard it will be to reach a revenue-neutral result. The cost of fixing the AMT over the next decade is estimated at $600 billion to $1 trillion. Either severe budget cuts would be required, or somewhere taxes would have to go up. Figuring out what sector of the economy has to pay more will be a tough political choice.
In its approach to tax reform, the commission should be candid, bold, and fair. The panel needs to be frank in laying out the tough choices the nation faces in raising the money to pay its bills. Boldness will be required in seeking new approaches to taxation - including a hard look at consumption-based taxes - that foster economic growth and are less prone to being gamed by individuals and corporations. And it must be fair in ensuring that the poor are not disproportionately affected.