Saturday, June 09, 2007

Candidates’ Tax Plans Are a Mystery

Published: June 8, 2007

Opportunities for real tax reform are rare. But when they do come along, something good can happen only if political leaders are prepared with a plan they can sell to a populace that knows the shortcomings of the present system but is suspicious of changes that may cost them money.

Otherwise, tax legislation ends up parceling out breaks — and sometimes punishments — based on some combination of quiet lobbying and loud grandstanding. The inevitable result is a more complicated, less logical system.

We are nearing a time of opportunity. George W. Bush will bequeath to his successor a tax system that everyone agrees must be changed by the end of 2010. It should be changed at least a year before that.

But if any of the presidential candidates are thinking seriously about the opportunities that will bring, they have kept the information to themselves. And that is a pity.

At the two presidential debates this week, there was almost no discussion of taxes.

Democrats seemed to agree that Mr. Bush’s tax cuts for the wealthy should expire, but not those for the middle class, a group that has expanded to include people who make as much as $200,000 or $250,000. Republicans spent much more time discussing immigration and evolution, but one candidate did find time to denounce a Democrat, Senator Hillary Rodham Clinton, for wanting to end the tax cuts.

We are in this mess — or this opportunity — because in 2001 and 2003, when Mr. Bush and a Republican Congress pushed through tax cuts, they wanted to make them as large as possible. For parliamentary reasons, and for budget arithmetic reasons, they allowed many of the cuts to expire at the end of 2010.

The result is that if nothing is done, tax rates will rise in 2011, and the estate tax, after being repealed for one year, will return to pre-Bush levels. Tax receipts of the government will soar.

The last real bipartisan tax reform was in 1986, when President Ronald Reagan persuaded Congress to pass a bill that lowered tax rates and eliminated lots of games that people had played to avoid paying the old high tax rates. It greatly simplified the tax code.

Congress was soon back to making it more complicated, passing provisions to benefit assorted industries and individuals and to encourage, or discourage, various types of economic behavior. The law is now more complex than ever.

There is no shortage of ideas for fundamental change. Senator Ron Wyden, Democrat of Oregon, has traveled around to promote what he calls a Fair Flat Tax Act, which is basically an attempt to go back to what Mr. Reagan enacted. It would get rid of many deductions — but save some of the more popular ones, like retirement savings accounts and mortgage interest — and have three tax brackets, of 15, 25 and 35 percent.

It would treat all income the same, ending preferential rates for capital gains and dividends, and, Senator Wyden says, would feature a tax form that anyone could fill out without help.

“People spend more on tax preparation than the federal government spends on higher education,” Senator Wyden said this week.

Another idea with some support is to lower income taxes and use a carbon tax, based on the amount of carbon used by a person or company, to both provide a major source of government financing and to help the environment. (“Tax waste, not wealth,” says the slogan.)

A consumption tax has its virtues as well. Michael J. Graetz, a Yale law professor and former Treasury official in George H. W. Bush’s administration, promoted a value-added tax — a national sales tax similar to that used in European countries — combined with an income tax that would apply only to those with very high incomes. His article promoting the idea was called “100 Million Unnecessary Returns.”

The 1986 tax act came after a long and detailed study at the Treasury, which was needed because there were sure to be details and unintended consequences of any proposal to be thought through before lobbyists began their attacks. And it came during Mr. Reagan’s second term, when he did not need to worry about re-election.

“It’s almost impossible to make tax reform happen unless a president is willing to tell people how broken the system is,” Senator Wyden said.

The risk now is that candidates will fear bad publicity — “She wants to raise taxes on regular people,” or “He wants to get rid of the mortgage interest deduction” — and will stick to vague platitudes until the election is over.

Then there will not be enough time to put together a comprehensive bill, and an opportunity will have been missed.

Instead, the country will get a warmed-over version of the arguments of the last few years, but no fundamental change.