Monday, November 15, 2004

STANFORD, Calif. — Economic advisers who helped President Bush craft his first-term tax cuts favor deeper across-the-board rate reductions instead of more radical alternatives to the tax system, which are viewed as unlikely to pass.

Although Mr. Bush’s outside advisers at the Hoover Institution think tank at Stanford University say a flat-tax system is desirable, they do not think that it, or a national sales tax, has the political support needed to win approval from Congress.

Instead, they urge Mr. Bush to follow the revenue-neutral policy course set by President Reagan in his second term when he broadened the tax base by getting rid of special-interest loopholes, exemptions and credits and applied the revenue gains to lowering the tax rates further.

“The best thing to do is what Reagan did and keep lowering the income-tax rates across the board,” said Martin Anderson, who was Mr. Reagan’ first White House domestic adviser and part of Mr. Bush’s team of policy advisers in his 2000 campaign.

Like other economists at Hoover, from where Mr. Bush has drawn many of his policy advisers, Mr. Anderson likes the idea of a flat tax, but said it would be difficult, if not impossible, to apply it to every income level without having some paying more than they do now.

“A flat tax is hard to do, but it’s a good goal that policy-makers should keep in front,” said economist John Cogan, who advises the White House on tax and budget policies. He was appointed by Mr. Bush to a bipartisan commission on Social Security reform in 2001.

A more achievable and equally worthy goal, Mr. Cogan said, is “a simpler tax system that has fewer tax deductions and credits and lower tax rates on both the corporate and personal side.”

Although the idea of replacing the Internal Revenue Service code with a national sales tax has its adherents, it generally gets a cool reception among economists at the institution.

“There are advantages and disadvantages, but I think that it may well be beyond where our political system is now likely to go,” said Michael J. Boskin, the former chairman of the President’s Council of Economic Advisers and a senior fellow at Hoover.

Mr. Boskin also supports base broadening and lower rates, adding “You wouldn’t have to broaden the base as much as [cutting] the tax rates because of the economic growth effects from lower tax rates. I think it’s doable.”

Mr. Bush did not announce his second-term tax-reform goal until Sept. 1, when the general election run was about to begin in earnest, but his emphasis in his campaign was on simplifying the tax code, rather than deeper tax cuts.

But economists who are close to the administration’s policy-makers said his goals are actually a lot more ambitious than he has signaled thus far.

“Bush has talked of simplifying the tax code, but we know he wants to lower the rates,” Mr. Cogan said, just as Mr. Reagan did with his sweeping tax reforms of 1986.

He and other advisers said they remembered Mr. Bush talking with them about the need for full-scale tax reform well before he decided to run for president in 2000.

“Bush came out here in early 1998 and met with a bunch of us, Boskin, Cogan, [former Secretary of State] George Shultz and others, and all we talked about was policy,” Mr. Anderson said.

“From our original meetings before the 2000 campaign got started, Bush always expressed an interest in tax reform, but his first priority then, properly, was to cut taxes first and do reform later,” Mr. Boskin said.

“His instincts along this line are very good. His goal is to have a tax code that is less of a drag on the economy and on people, to have less paperwork. That’s his big-picture idea.”

Still, there were questions about whether Mr. Bush could successfully tackle major tax reform and equally ambitious Social Security reforms in the same year.

“You have to wonder if you can do both of them at the same time,” Mr. Cogan said. “I think you can do both of them in the same term.”

Mr. Cogan’s advice is to move quickly on Social Security early next year, “while doing the necessary studies on tax reform and then do tax reform in 2006.”

Mr. Bush’s Social Security commission already has set forth proposals to let workers invest some of their payroll taxes in stocks or bonds. The president ran on getting those reforms passed next year.

However, Mr. Bush does not intend to name a commission to study tax reform until next month, which means delaying specific recommendations until sometime next year.

“It’s always an uphill fight to get major reforms, but with Social Security you’ve got to get it sooner rather than later or you are not going to get it at all,” Mr. Cogan said.

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