Will Tax Reform Be an Increase?

The Washington Times (Washington, DC), August 8, 2005 | Go to article overview

Will Tax Reform Be an Increase?


Byline: Chris Edwards, SPECIAL TO THE WASHINGTON TIMES

Will President Bush reverse course on fiscal policy and raise taxes? At first thought that seems unlikely because the president would not want to tarnish his tax-cutting record. But "tax reform" has replaced "tax cuts" on the Washington agenda, and that poses dangers for taxpayers.

The president's tax reform panel, headed by former Sen. Connie Mack, will report its findings in September. The panel is charged with proposing "revenue-neutral" options, which seems to rule out tax increases. However, in at least three ways higher taxes threaten to become part of tax reform.

The first threat is the alternative minimum tax. The revenues from this add-on tax are expected to explode from $20 billion in 2005 to $112 billion by 2010. The administration says it wants to fix the AMT on a revenue-neutral basis - but that means surrendering to a tax increase of about $750 billion over the next decade. The president's tax panel has similarly included rising AMT revenues in its baseline, thereby baking a tax increase into the tax reform cake.

Tax increases are bad economics, and this approach is also bad politics. Consider a tax package that combined repeal of the AMT with repeal of some tax breaks, such as the deduction for state taxes. Taxpayers would see the former as an intangible future benefit, but the latter would hit them very directly.

A better idea is to repeal the AMT outside of tax reform and offset the budget impact with spending cuts. Most policymakers, including liberals from high-tax states, say they favor AMT reform, so let's get that done first. Then, a tax reform package could combine tax rate cuts with ending the state tax deduction and other breaks. That would be a fair swap taxpayers would understand.

A second tax threat stems from the president's panel using static revenue scoring for tax proposals. This is not an obscure accounting issue. Static scoring will result in a reform raising too much money if enacted because the growth benefits will not be considered as they would be with dynamic scoring. …

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