December 9, 2005

Neither flat nor fair…

When President George Bush’s Advisory Panel on Federal Tax Reform released its final report last month, we found the recommendations therein to be – how shall we say this? – utterly underwhelming.

Ten months ago, President George W. Bush created the advisory panel rather than engineer a tax-reform plan from within his own administration. Perhaps this appealed to the President’s desire to be a team player; to his desire to befriend congressional Democrats. As the panel’s report confirms, however, such desires don’t get anyone very far in Washington, DC.

In its report, the panel offered two plans for tax reform, either of which would be DOA, deep-sixed, hasta la vista, tagged-and-buried were it ever sent to Capitol Hill. Of course, were either proposal to somehow survive a floor vote, any chance for meaningful tax reform during the remainder of this President’s term would be all but eliminated.

What, exactly, did the panel recommend? Anything but real reform, it would seem. Instead of proposing a low flat tax, the panel suggested a high graduated tax. The Internal Revenue Service – and its five-million-word tax code – is left intact, but more dysfunctional than ever. And what of the oft-mentioned national sales-tax proposal? This didn’t receive a moment of attention, despite the fact that President Bush has said that such a consumption-based tax “is an option we should consider seriously.”

Leo Linbeck, chairman of Americans for Fair Taxation, which advocates for a national sales tax, laments that the commission “is missing out on the massive populist appeal of tax reform, which is to eliminate the income tax and the IRS from our lives.” The Advisory Panel’s report, he says, “has all the makings of another top-down tax reform, rather than a plan that bubbles up from the grass roots.”

Former House Majority Leader Dick Armey, a principal advocate for the flat tax, lodges a similar complaint: “For tax reform to galvanize the voters and to overcome the special interests, the plan needs to be pure, simple and revolutionary.”

Neither flat nor fair, the panel’s two plans propose income-based systems with three and four income-tax brackets, with top tax rates of 30- and 33-percent, respectively. That’s a modest decrease from today’s top bracket of 35 percent, but even that niggardly flattening of the tax schedule came to the panel as an afterthought. The President’s directive had been to keep both plans revenue neutral – drawing no more or no less tax revenue than the current system – and this, they eventually realized, necessitated a lowering of the rates.

(Here we might add that even John Maynard Keynes, father of that child of perdition, demand-side economics, maintained that 25 percent was the highest tolerable rate for income taxation.)

Where did the panel find the savings for this act of benevolence? By ending federal deductions for state and local taxes paid, stripping tax-free provisions on employer-provided medical insurance, and chopping off home-mortgage deductions at the knees. Proposals of this sort can only be interpreted as tax increases on the middle class.

The primary reason for the panel’s failure is its composition. Former Sen. John Breaux of Louisiana, a Democrat, headed the panel, which was co-chaired by former Sen. Connie Mack of Florida. Mack, a Republican, seems to have parted ways with his supply-sider cohorts since his days as chairman of the Joint Economic Committee in the 104th Congress. Breaux and Mack were joined on the panel by former Republican Rep. William Frenzel, the geriatric Minnesotan who proved a gadfly to fiscal conservatives as the House Budget Committee’s ranking Republican in the 1980s. In short, none of the panel’s members were committed to the President’s purported vision of meaningful and comprehensive tax reform.

Clearly, the President’s plans for dynamic change in the tax code have been sabotaged, but why would an administration that purported to be so serious about tax reform entrust the job to a panel of pantywaists? Was it really nothing more than a hollow exercise?

A far more legitimate effort comes from Jim DeMint and Lindsey Graham, the South Carolina Senators who – in the best tradition of the Palmetto State – are willing to put their money where their mouths are. In response to the President’s Advisory Panel debacle, Senators DeMint and Graham have offered a plan to eliminate the personal-income tax completely, replacing it with the aforementioned national consumption tax. Unlike most fair tax plans, however, the tax burden is equally distributed between businesses as a value added tax (VAT) and consumers as a national sales tax. Both the sales tax and the VAT would be a comfortable 8.5 percent, eliminating not only the income tax, but capital-gains taxes, the death tax, and taxes on Social Security benefits – not to mention the onerous association we Americans have long had with April 15th.

Sen. Graham came on board with the junior senator’s plan because it would place U.S. and Chinese goods on a level playing field. “Now the Chinese goods would have to be charged the consumption tax just as American-made products would be,” says Graham. Sen. DeMint, meanwhile, points out that the VAT would be “very visible to the final end-use consumer. The taxes paid by businesses would show up as a line on the final receipt.” To assuage opponents of regressive taxation, the plan also incorporates a universal sales-tax rebate eligible to anyone living under the poverty line.

In the final analysis, “getting the IRS out of people’s lives,” says DeMint, “is the key to getting Americans fired up about tax reform.” Now that’s leadership. In fact, to Americans serious about tax reform, Jim DeMint’s argument sounds, well, pretty presidential. It seems that some on Capitol Hill still understand that the tax code is the most oppressive assault on liberty within the federal government’s purview – and unlike the President’s Advisory Panel, they’re serious about fixing it.

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