What with nightly riots in France and the Democrats’
closed-Senate-session stunt last week there wasn’t much room in the
news for the report submitted by the President’s Advisory Panel on
Tax Reform. That’s just as well, for after working on the project
all year, the Panel came up not with tax reform, but tax
rearrangement, a murky pudding of trade-offs.
For example, it proposed to eliminate the odious Alternative
Minimum Tax (actually it is an Alternative Maximum Tax), but added
several new burdens on taxpayers. It would put a ceiling on the
amount of mortgage loan interest that is deductible and would
remove state and local taxes paid from the deductible list. The
latter would mean that taxpayers would pay a tax upon taxes.
The Task Force was charged with developing recommendations to
make the federal tax system fairer, so long as it was “revenue
neutral.” Thus, it was hamstrung from the beginning because it had
to operate under a hoary principle much loved by tax collectors and
supporters of big government, to wit: static analysis.
Static analysis work this way: Let us say the Task Force wanted
to reduce a particular tax burden on you that would reduce your
overall tax bill by $100. Static analysis assumes you will put the
$100 under the mattress. That, of course is what not what you would
do. You would put it in savings, an investment, a purchase or pay
down debt with it. Alas, the government is wedded to the Mattress
Theory of tax relief, so it says your tax relief will “cost” it
$100.
Whenever a particular tax reform (that is, reduction) is
proposed, the static analysis folks say, “But how are you going to
‘pay’ for it?” Thus, several sensible ideas considered by the Panel
had to be “paid for” by generating equivalent tax revenue somewhere
else. That is what is meant by “revenue neutral.” Thus, if the
Panel’s report were to be proposed as legislation a good many oxen
would be gored. The only winners in that case would be the
lobbyists employed by the various oxen.
The Republicans, despite controlling Congress and the White
House, seem to lack the stomach for a fight over “static analysis.”
Yet, there is ample evidence that static analysis produces
inaccurately gloomy projections and thus supports the status quo
and blunts efforts at reform. When Ronald Reagan proposed his
across-the-board tax cuts in 1981, the Office of Management and
Budget, operating under static analysis ground rules, projected a
loss of Treasury revenue if the measure passed. It did, and once it
became fully effective it generated hundreds of millions of new
dollars for the Treasury. The same thing happened twice earlier in
the 20th century, with the Coolidge and Kennedy tax cuts. Yet the
revenue gains were greeted with surprise by conventional
thinkers.
One lesson not learned after the Reagan tax-cut experience is
that dynamic analysis of the consequences of tax-cuts would produce
more accurate projections than does static analysis, and puts
“paid” to the “How are you going to ‘pay’ for the tax cuts?”
argument of the stand-patters.
President Bush’s Advisory Panel should have acted as if it was
beginning with a clean slate: Wipe out the nine-million-word
federal tax code and start fresh. In 1996, the National Commission
on Economic Growth and Tax Reform, chaired by Jack Kemp (and of
which Treasury Secretary John Snow was a member), reported, “It is
time to replace this failed system with a new simplified tax system
for the 21st Century — a single low rate, taxing income only once,
with a generous personal exemption.”
That would have been a good starting point for the 2005 Panel
and would have led them to what is usually called the Flat Tax, a
system outlined with great clarity in Steve Forbes’s recent book,
Flat Tax Revolution. The system is a model of
simplification. Double-taxation is eliminated. So are deductions
and credits; however, a generous personal exemption makes up for
them. Forbes concludes that you’d be able to file your annual tax
return on a postcard. And, he says, it is not “revenue neutral.”
Indeed, his projections, using dynamic analysis of the economic
factors involved, show increased Treasury revenue as a result of
increased economic activity. Now that’s tax reform.
Peter Hannaford is the author of Recollections of
Reagan (pdh3292@aol.com).
