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Tax Reform Panel Gets To Work; Investigates National Consumption Tax

A"hybrid" income tax-consumption tax system, among other alternatives, caught the interest of President Bush's Tax Reform Panel during its first official meeting in Washington, D.C. on February 16. The panel has begun what is expected to be a six-month process of gathering information about how the Tax Code should be reformed. The panel's recommendations likely will be a blueprint for major changes in the second Bush Administration.

 Comment. The Tax Reform Panel appears to be marching in step with the president's "big picture vision." Last month, commenting on his second term, Bush stressed, "We're setting big goals." Reforming - or replacing - the Tax Code is without a doubt a big goal, maybe even bigger than Social Security reform. Despite the president's bold agenda, many tax experts, lobbyists and politicians predict piecemeal changes, primarily within the current income tax framework. Lobbyists are especially concerned that the fortunes of certain industries may be won or lost over the tax debate that will take place over the next six months. Meanwhile, economists continue to criticize any process that would continue uncertainty over the tax impact of business decisions for any significant period of time.

White House priority

Treasury Secretary John Snow was the first witness to testify and had sharp words for the Tax Code. "While America remains known for its economic flexibility and dynamism, our Tax Code has grown larger, bulkier, more burdensome, and lethargic with each passing year, Snow said. The secretary also criticized the Code's loopholes, exceptions and lengthy explanations.

Snow emphasized several times that tax reform is a priority for the president. He repeated some of the criteria that Bush has said a new Tax Code must include. "A new Code should carry on the good traditions of recognizing the importance of home ownership and charity," Snow said.

Traditional and new approaches

Stephen Entin, president and executive director of the Institute for Research on the Economics of Taxation, told the panel that creating a national consumption tax would be good tax policy. It is the best measure of income, he said, and more than fair because it respects efforts to work and save. Tax-deferred savings would create wealth faster and in larger amounts than income that is taxed, he explained.

William Gale of the Brookings Institution warned that a national consumption tax would not be a panacea for tax reform. He explained that it is a poor measure of a taxpayer's ability to pay. A consumption tax would also be complex. Gale recommended preserving the current income tax regime.

John Breaux, vice chairman of the panel and former Democratic senator from Louisiana , asked for comments about a "hybrid" system with income and consumption taxes. Louis Kaplow, professor of law and economics at Harvard Law School , said that expanding the ceiling on IRA and 401(k) contributions would be a step toward this. A value-added or national sales tax of five to 15 percent would also achieve it.

 Comment. Speaking to reporters after the meeting, Breaux did not directly indicate if he is leaning toward a combination of consumption and income taxes but said that "combinations and ideas need to be looked at very carefully."

What it sees as problems

Although the panel hasn't made any recommendations yet, it has made some interesting observations about the current tax system. These may give some insight into its approach to tax reform.

In a Fact Sheet distributed in conjunction with its first meeting, the panel highlighted some of the problems it sees:

 The Tax Code contains more than one million words.

 The number of pages in the Tax Code and regs has more than doubled over the past 20 years.

 In 1940, it took only two pages of instructions to fill out Form 1040; today, the 1040EZ has 36 pages of instructions.

 Today's "short" income tax form takes more than 11 hours to prepare about the same time as the "long" form did 10 years ago.

 By 2010 more than one-in-five individuals will have to calculate their income taxes twice. Once for the regular income tax and once for AMT .

Public input

The Tax Reform Panel wants to hear from the public. Specifically, the panel wants input about:

 Headaches, unnecessary complexity and burdens that taxpayers, both individuals and businesses, face because of the existing system.

 Aspects of the tax system that are unfair.

 Specific examples of how the Tax Code distorts important business or personal deductions.

 Goals that the panel should try to achieve as it evaluates the existing tax system and recommends options for reform.

 Comment. Go to www.taxreformpanel.gov for information on how to submit comments. The panel has said that at this point it is not looking for specific proposals.

On the road

The Tax Reform Panel will be hitting the road in the future. Mack said that the panel will hold public meetings across the country. Dates and locations will be announced soon. The next meeting is scheduled for March 3 in Washington , D.C.