America's richest expect tax cuts as review starts

Author: Gabriel Rozenberg

Published: February 17, 2005

AMERICA's high-earners are hoping for another round of cuts in their tax bills on the back of a review of the US tax code starting this week.

President Bush has given a commission of former senators and experts six months to bring order to America's complex tax structure. Mr Bush made reform of the 3,000-page code one of his re-election pledges and wants the commission to make taxes simpler and more conducive to economic growth.

Analysts believe that the President has already settled on radical plans of his own. They see his previous tax cuts as part of a long-term attempt to move from an income tax to a system of taxing consumption, in which savings and investments would be free of tax. Last week, Mr Bush repeated his proposal for simplified lifetime and retirement savings accounts in his 2005 budget.

Grover Norquist, a lobbyist who heads Americans for Tax Reform, said: "The purpose of the commission is that it allows you to float a plan that doesn't have the President's fingerprints on it."

Mr Norquist said that White House plans for lifetime savings accounts, scrapping inheritance tax and ending double taxation of investment would lead to all savings being tax-free. "We are moving towards a consumption tax not in one step, but step by step," he said.

Republicans argue that cutting taxes on savings and investment would help the economy. Democrats say that the practical result may be to lift a tax burden from the rich, who make more of their income from savings, and spread the burden across the middle class.

Chris Edwards, of the free-market Cato Institute, said that such an effect was inevitable. "Because there has been a substantial shift in income towards the top 1 (per cent) and 10 per cent, those folks pay a huge share of the overall tax burden now," he said. "If you talk about cutting taxes it is almost impossible not to give cuts to the folks at the top."

Don Susswein, a lawyer who advised the US Senate Finance Committee during the 1986 tax reforms, agreed that simplifying tax would have to make it less progressive. "Eighty per cent of the revenue comes from taxes on wages, but 80 per cent of the complexity comes from taxes on investment income, and 80 per cent of that money comes from the very rich," he said.

However, Mr Susswein said, voters would support any plan that made their tax returns simpler, such as exempting most savings from tax. "I believe that Bush would get tremendous political capital from doing a simplification like that for the mass of Americans," he said. "The value of that is not really the money, it's the peace of mind that when you open up the bank account you don't have to think about it. Right now, tax gives the lower-income person another reason not to save."

Changes to the tax system will be made more difficult by the record $412 billion (£220 billion) federal budget deficit, which Mr Bush has pledged to halve by 2008.

Last week, the White House unveiled a $2.5 trillion budget, which contained the growth in overall spending at below the rate of inflation.

Graphics: Tax Policy Center.