Almost everyone supports the notion that the U.S. tax system needs to be overhauled, but few agree on exactly how it should be done. So it was a shame on July 20 when the first public debate by President Bush's Advisory Panel on Federal Tax Reform got drowned out amid all the noise surrounding the President's day-earlier nomination of John G. Roberts to the U.S. Supreme Court.
Unfortunately, tax reform has a tough time holding public attention because it's not necessarily about cutting taxes -- at least not in the aggregate. Indeed, one of the mandates President Bush gave to the tax panel was that its recommendations should raise about the same $2 trillion that the feds currently collect annually. That means any changes will shift, not lift, the tax burden. So there will be winners and losers aplenty. Should we eliminate all taxes on capital assets like stocks or bonds, stimulating investment but giving the wealthy a windfall? Will Americans accept an easy-to-understand flat tax or consumption levy if the cost is the end of deductions for state and local taxes or home mortgage interest? And which business taxes may have to be increased by $600 billion over the next decade so the unpopular alternative minimum tax for individuals can be eliminated?
Such tough choices are sure to elicit howls of protest from the public and business, each eager to protect existing tax preferences. That's why the Bush Administration should be preparing a fallback plan of less ambitious tweaks to the current system, such as partial AMT relief, and moves to improve tax fairness, such as tilting savings incentives more toward lower-income groups. The Treasury should also launch a big effort toward tax simplification. There are myriad confusing, often overlapping tax policies -- for instance, there are currently more than a dozen tax-advantaged savings incentives -- so simply bringing some order to them would go a long way toward making Apr. 15 easier to stomach.
Ideologues will surely call this small thinking that misses an opportunity to impose some much-needed discipline on our runaway federal budget. But tax policy shouldn't be used as a backdoor means to effectively starve government. If Americans want smaller government, they should demand that their elected officials show fiscal discipline and curb spending. Taxes then can easily be lowered. Besides, as we've learned from Bill Clinton's failed health-care program and Bush's fading Social Security effort, setting overambitious reform goals risks making tax overhaul so ponderous that it will crumble under its own political weight. Let's hope the President recognizes the important analysis his tax commission can provide -- and its limits.