- The Washington Times - Thursday, October 13, 2005

The President’s Advisory Panel on Tax Reform got hijacked this week and is heading toward the White House loaded up with tax increases mislabeled as “reforms.” If the president accepts delivery of this toxic cargo, it could poison the well for tax reform for years to come.

We hope the president learned a lesson when his Social Security Commission got hijacked back in 2001: Shoot out the tires of run-away panels and commissions before they dump their loads on your doorstep. In a public meeting on Tuesday, panel chairman and retired Senator Connie Mack made clear that the group rejects any form of fundamental tax reform and has opted instead for old-fashioned tinkering. According to Mr. Mack, the panel is “getting focused on the income tax as a base” — a fundamental error. Consumption, not income, should define the tax base. The panel is poised to recommend a massive middle-class tax hike, significant tax relief for upper-class elites and probably removing even more low-income workers from the tax rolls entirely.

The Alternative Minimum Tax was always the key element driving tax reform this year. The AMT increasingly ensnarls taxpayers in high-income metropolitan areas, substantially increasing their federal income-tax liability. Political geography tells us that the problem is most severe in high-income, coastal blue states, which creates a unique political opportunity. Rolling AMT repeal into fundamental tax reform would have made it very difficult for Senate Democrats to stonewall tax reform the way they have Social Security reform. Instead of seizing this unique opportunity and deploying AMT repeal strategically, the panel has allowed it to become the centerpiece of its recommendations. The panel, apparently hijacked by Democratic Vice Chairman John Breaux, has started from AMT repeal and then pieced together $1.2 trillion in middle-class tax hikes to offset the cost.

We know what the middle-class tax hikes are likely to be. The first will be to cap the home-mortgage interest deduction at around $250,000 to $300,000. The second middle-class tax hike will be a cap on tax-free employer-provided health insurance. Under current law, when an employer pays for health insurance, the employee does not have to declare the benefit as income or pay tax on it. The panel would cap untaxed health benefits at around $11,000, which means the value of any health benefits in excess of that amount would have to be declared as taxable income.

Those two sizable tax hikes together still won’t pay the tab for AMT repeal, so the panel also is floating the idea of limiting the deductibility of state and local taxes, another major middle-class tax hike. Regardless of the details, the approach the panel is taking requires finding $1.2 trillion in tax hikes, which will hit the middle class and the economy hard.

The panel’s approach shows a remarkable lack of imagination and a seeming unawareness of the abundant research by economists on the issue. Economists have long argued that replacing our economically destructive tax system (which penalizes work, saving, investing and entrepreneurial risk-taking) with a simple, single-rate consumption-based tax would dramatically boost economic growth and raise more revenue at lower rates. The panel’s decision to tinker at the edges of the current tax system is simply mind-boggling. This is a plan that could have been pieced together from the exhaustive menus of tax increases regularly published by the Joint Committee on Taxation.

President Bush should dismiss this panel before it causes any further damage. He must make clear that his vision is real, fundamental tax reform that scraps the current Internal Revenue Code and replaces it with a simple, efficient, rational system that does not double-tax savings and investment. Thankfully, tax-reform-minded members of Congress are not waiting on the president to submit a plan as they did with Social Security. Next week, Sen. Jim DeMint, South Carolina Republican, plans to introduce a bill that would replace the individual and corporate income taxes with a two-tiered, simple consumption tax — an 8.5 percent retail sales tax on consumers combined with an 8.5 percent transfer tax on businesses. It’s not too late for Mr. Bush to move genuine tax reform. But he’ll have to ignore his own panel to do it.

Lawrence Hunter, Ph.D., is vice president and chief economist and Phil Kerpen is policy director of the Free Enterprise Fund.

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