You Call This Tax Simplification?

The Administration trips itself up in its push for reform

Someday, the Bush Administration would like to push for major tax reform by ditching targeted write-offs and further trimming rates. And it has promised to take some small steps in that direction this year. By Apr. 15, the White House will unveil a few initiatives to begin simplifying the mind-numbing code.

One idea would meld five rules for deciding whether a child qualifies for tax breaks into a single standard. Another would streamline rules on eligibility for individual retirement accounts. Later this year, the Administration will push similar changes for business that are aimed at simplifying the tax treatment of overseas income and depreciation of equipment.

Many of these changes are long past due. Complex tax laws not only make filing returns too hard but also make people deeply cynical about the law. Treasury Secretary Paul H. O'Neill, who is heading the simplification effort, calls the current code "an abomination." President Bush has given him the green light to come up with fixes.

There's just one problem: Even as the White House says it wants to scrub the code, it is working overtime to add to the clutter. The Bushies embraced 37 targeted tax breaks in their 2003 budget. At least 20 would make the law more convoluted than it is now, figures Chris Edwards, fiscal policy director at the Cato Institute. "It's a huge contradiction," he says.

Worse, it encourages Congress to pile on. Today, farmers get a tax credit for generating electricity from what is delicately called poultry litter. The White House wanted to dump the chicken break but add a new one for turning landfill gas into energy. Instead, Congress will back Bush's trash subsidy--even as it saves the chicken loophole. And it will add another credit for pig and cow waste.

Then there's health care. Bush would add five separate tax breaks for medical costs. He would create two credits aimed at insurance--a temporary version for workers who recently lost their jobs and a permanent one for those who work but don't have coverage. He also would expand tax-advantaged medical savings accounts and create a new tax incentive for buying long-term-care insurance. Each could help people, but the multiple breaks will mean more rules, forms, and headaches.

Similarly, Bush is proposing seven new tax breaks for charitable giving. One would let nonitemizers deduct $100 in gifts this year, rising to $500 by 2012. This would add yet another line to tax forms. Worse, it would curtail a big benefit of the standard deduction: the right to throw away receipts.

Politicians don't make the tax law complicated for its own sake. They do it to support policy goals and to dole out goodies to voters. "The President and Congress have used the income tax the way my mother employed chicken soup: as a magic elixir to solve all the nation's economic and social difficulties," says Yale University law professor Michael J. Graetz.

Indeed, Bush is hardly alone. President Clinton was famous for his slice-and-dice tax policy. And in the 2000 campaign, Al Gore proposed at least 13 carefully targeted tax breaks, each aimed at potential supporters.

At the time, Bush ridiculed the Gore strategy, to good effect. Now he has embraced many of Gore's proposals. On Feb. 25, he took to the White House driveway to promote a tax credit for buying cars powered partly by fuel cells. Taxpayers will happily take the money--as much as $4,000. But they'll be less than thrilled with the rules they will have to follow to get it. Still, the idea has strong bipartisan support on Capitol Hill, where lawmakers are busily adding their own tax breaks to Bush's energy plan. "Everybody does this," says Brookings Institution economist William G. Gale. "Every year they agree that the tax system should be simpler--and they make it more complicated."

Bush's long-term desire to restructure the tax law is laudable. Cleaning up obvious problems could be a good start. But by adding loopholes to today's code, he's only making real reform that much tougher.

By Howard Gleckman in Washington

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