Panel: Tax changes won't be easy task

Bush wants system to be easier, fairer

Author: Bob Dart

Published: February 17, 2005

Washington --- Making it easier for ordinary Americans to figure out their federal taxes will be hard, witnesses warned President Bush's panel on tax reform Wednesday.

"We face an extraordinarily difficult task," said John Breaux, former Democratic senator from Louisiana and commission vice chairman.

In its opening meeting, the Advisory Panel on Federal Tax Reform said it would consider a wide range of changes. They include:

* Replacing the current income tax, completely or partially, with a national sales tax or some other levy on consumption.

* Creating a value-added tax, imposed at each stage of an item's production.

* Widening the tax base.

* Eliminating some popular deductions.

* Making all savings tax-exempt.

"Options may include making modifications to current law, overhauling the existing system or replacing the current structure and starting over," said Connie Mack, the former Republican senator from Florida who is heading the commission.

The panel's recommendations are due at the White House by July 31.

Reform has been tried before, several expert witnesses told the panel. Between 1987 and 2004, more than 10,000 amendments were made to the Internal Revenue Service code, noted former IRS Commissioner Fred Goldberg.

But the result was a complex system in which more than half of all Americans now use a paid preparer to file their taxes, Mack said.

"Instead of making it as easy as possible, the tax code is an obstacle for those who pay their fair share," he said. It costs individual taxpayers more than $100 billion a year to get their returns calculated and filed, he added.

Bush charged the commission with making the federal tax system simpler, fairer and better at stimulating economic growth. At the same time, the recommendations must be "revenue neutral" --- neither raising nor lowering the total amount of money collected through taxes.

Any reforms must be "appropriately progressive" while "recognizing the importance of home ownership and charity in American society," said Bush's executive order --- a signal that the panel should tread carefully while considering the current tax deductions for home mortgage interest and charitable contributions.

Finally, Bush said any changes should "strengthen the competitiveness of the United States in the global marketplace."

In a presentation on the income tax's history, Goldberg said the system has been used not only to raise funds for federal functions, but also to promote families, homeownership, education, work, thrift, health care, education and economic policies from producing energy to encouraging domestic manufacturing.

It is because of tax policy that so many American workers have health insurance and pensions through their employers, he said, and the deduction for home mortgage interest has enabled many Americans to own their houses.

"This is not good vs. bad," he said of the resulting tax system. "It's good vs. good."

Asked how hard it would be to discard the current system and start over, Goldberg said, "I think it's impossible."

But other witnesses advocated doing just that.

Stephen Entin, president of the Institute for Research on the Economics of Taxation, suggested that taxing consumption would be fairer than taxing wages.

"We should tax what we spend," he said. The current income tax "taxes people more the more they work, save and produce by imposing graduated tax rates."

But a consumption tax generally raises the burden on low- and middle-income families because they are forced to spend a higher percentage of their income, said William Gale, co-director of the Brookings Institution's Tax Policy Center.

A two-tiered system in which income taxes and a national sales tax both are utilized might be possible, he said.

"We don't necessarily face a choice between consumption and income taxes," he said. "Many countries have both."

Mack said the commission would hold more public hearings, both in Washington and around the country.