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 (firstname.lastname@example.org).