Bush to Push for huge tax overhaul

[bmags]

"Bush expected to press for overhaul of tax code

Replacing system politically difficult

 

By William Neikirk

Tribune senior correspondent

Published November 7, 2004

 

WASHINGTON -- President Bush has signaled he wants to produce a major overhaul of the federal tax code in his second term rather than just tinkering around the edges--an ambition likely to be extremely challenging.

 

Experts see many political and practical difficulties if Bush takes a more radical approach to tax reform by adopting a national sales tax or a single "flat" income tax rate, even though the president has ruled out nothing as he prepares to name a tax commission to make recommendations.

 

But many analysts believe that, at the very least, any Bush rewriting of the tax code is likely to exempt significantly more of the savings of Americans from taxation. To many conservatives, this would be a step in the right direction but does not go far enough.

 

Conservatives are divided into three main camps. One group supports a national sales tax of more than 20 percent to replace the income tax. A second favors one income tax rate of less than 20 percent to replace the current four tax brackets, and a third prefers reforming the current income-tax system by ending many tax preferences and reducing overall tax rates.

 

Major tax overhaul seems unlikely, some analysts say, noting that Congress and the two parties are divided on the question and that true reform would remove precious tax breaks for many powerful interests that worked hard to get them.

 

In addition, many Democrats and moderate Republicans oppose changing the essential philosophy of the income tax system: the more you make, the higher your tax rate.

 

At this point, the shape of a tax-overhaul plan is nothing more than guesswork because Bush is far from settling on any package. But he has said he wants an overhaul that brings in the same amount of revenue as the current system and one that protects the charitable and mortgage interest deductions.

 

By mentioning these two deductions, said economist Bruce Bartlett, a Treasury official in the Reagan administration, one can "read between the lines" and conclude that Bush would prefer retaining a much-reformed income tax system, because both are deductions from the income tax.

 

As part of his effort to foster an "ownership society," Bush has proposed more tax-free savings accounts that would enable Americans to park significant sums of money tax-free.

 

Tim Kane, an economist at the Heritage Foundation, a conservative think tank, said he believed "tax reform is real, and it's going to happen." But he noted that the president will face major challenges in getting it through Congress, even one dominated by Republicans.

 

Ideas for current system

 

Instead of a single tax rate on all income, Kane said, Bush could make the tax system "flatter" by closing many loopholes and dropping the number of brackets from four to perhaps two as President Ronald Reagan did in 1986. At the same time, new tax breaks would be proposed for savings, such as more tax-free savings accounts.

 

"You can get a pseudo-flat tax by reforming and simplifying the income tax," Kane said. "It's doubtful you can get to a single rate."

 

Many members of Congress are "obsessed with this idea of progressivity," he added, referring to the fact that tax rates rise as income rises.

 

Nonetheless, Kane and other conservatives would prefer that Bush be bold and innovative in overhauling the tax system. Kane said he hoped the president would come up with a novel reform idea that would also eliminate the tax that employers and employees pay for Social Security.

 

Several analysts said that if Bush is to be successful, he will have to reach out to Democrats, in much the same way Reagan did in 1986, when Chicago's Rep. Dan Rostenkowski, a Democrat who was chairman of the House Ways and Means Committee, became a major supporter of tax reform.

 

At the moment, there appears to be no bipartisan support for conservative-style tax reform, such as a flat tax or a national sales tax, both of which are seen by liberals as regressive taxes that would hit lower-income groups the hardest.

 

Bush appeared to be distancing himself somewhat from the flat tax or sales tax ideas when he told reporters on Thursday that any tax changes would have to be "fair." This statement appeared to indicate he favored retaining a system that has higher tax rates for higher incomes, the progressive income tax. Bartlett said the 1986 tax-reform effort was enormously difficult and required several years of groundwork before Congress decided to pass it.

 

"Unfortunately, we're at ground zero right now," he said.

 

Edward Maydew, accounting professor and director of the University of North Carolina's Tax Center, said Bush in his first term signaled that he wants to tilt the tax system more toward taxing consumption. Lower taxes on dividends and capital gains are prime examples, he said.

 

When asked if Bush would do away with the current income tax system, Maydew said, "I wouldn't bet on it, but I would hope on it."

 

Robert Reischauer, president of the Urban Institute and a former director of the Congressional Budget Office, said he doubted any tax reform could pass in Congress.

 

"Tax reform is terribly difficult to accomplish because it involves not only very important philosophical issues, but also because it involves huge amounts of redistribution of income," he said. "Without money to offset the losses that some interests will experience, tax reform becomes a virtual impossibility."

 

But conservatives are upbeat about the chances for tax overhaul, and they say that, contrary to the concerns of liberals, conservative plans can be tweaked so that low-income Americans pay little or no tax.

 

House Speaker Dennis Hastert (R-Ill.) is an avid supporter of a European-style national sales tax and wants Congress to have hearings on it. Several House GOP members are backing a sales tax. Rep. Jim DeMint (R-S.C.), who supports a national sales tax, was elected to the Senate on Tuesday.

 

Tom Wright, executive director of Fairtax.org, a group pushing a national retail sales tax, said he believed the president "is going to listen very carefully to his advisers, not all of whom are totally on board with the [national sales tax]. We are going to do everything in our power to influence that."

 

23% sales tax proposed

 

The organization proposes a national sales tax of 23 percent. Wright said that the income tax would be jettisoned, along with Social Security payroll taxes, and the poor would be exempted from paying the levy.

 

Other analysts believe that the sales tax rate would have to be much higher than 23 percent, but Wright insisted the sales tax would bring in enough money to replace the income tax and payroll taxes.

 

Wright said the flat income tax, pushed by such conservatives as former House Majority Leader Dick Armey (R-Texas) and former Rep. Jack Kemp (R-N.Y.), is dead.

 

"There is no grass-roots support for the flat tax," he said.

 

But Stephen Moore, president of a political action group called the Club for Growth, which supports conservative candidates, said he believes Bush is "very likely to adopt a really bold restructuring of the tax code" with a flat income tax.

 

He said those who support the national sales tax have a practical problem: repealing the income tax, which was approved with passage of the 16th Amendment to the Constitution. "

 

 

 

I, for one, would have liked this mentioned before he won the election...but theres no way a flat tax, unless the republicans had 60 seats, that they could get that through.

[Soxy]

This WAS hinted at before the election--but I don't think a lot of people took it seriously. Oh well.

[bmags]

he talks in such simple terms its hard to imagine anything is being inferred...all i heard about was keeping his tax cuts for the wealthy...er

[Rex Kickass]

A 23% National Sales Tax would be an unmitigated disaster.

 

Instant inflation to the average consumer.

[jackie hayes]

A 23% National Sales Tax would be an unmitigated disaster.

 

Instant inflation to the average consumer.

The worst part is that it would be enormously regressive, even w/ the poverty exemption. All the tax reform proposals being floated now have the property that reduced tax rates for the rich would be financed by raising taxes on the poor. The Republicans, if these plans go through, will become the worst stereotype of the party. The NYT has a great summary of Bush's coming fiscal reforms here.

[shagar69]

flat tax rate is bulls***. the more money u make the more tax u have to pay

[Soxy]

So, I was just thinking about this. I make less than $15,000 a year. So, if I were to buy a $10,000 car (not even a good car) I would pay more in sales tax under this plan than I pay in income taxes all year. Damn, that really sucks.

[EvilMonkey]

flat tax rate is bulls***. the more money u make the more tax u have to pay

Even under a flat tax, the more money you make, the more taxes you pay. Why should it be the more money you make, the higher percentage of it you pay?

[jackie hayes]

Even under a flat tax, the more money you make, the more taxes you pay.  Why should it be the more money you make, the higher percentage of it you pay?

B/c each extra dollar is less valuable than the last. Think of it in terms of income 'groups'. The very poor spend their money on what is needed for survival, so we believe that they should not have much of that taken away, if any. The next group has some spending money for basic comforts (somewhat better food, more nutritious, an inexpensive used car so that the commute to work takes half the time of a bus, going to the movies occasionally). The next group can eat out occasionally, but can't realistically think about buying a house. And so on. Eventually, you have people who earn many hundreds of thousands of dollars a year. These people can buy property in the best parts of town and all the nicest toys. They barely spend any part of that last dollar of income, largely b/c their needs and wants have been satiated.

 

It seems unfair to take the same amount of income per dollar away from someone who's using their last dollar to buy bread or more convenient baby food, and someone else who's using it for a $250 bottle of wine or a vacation to Europe. Those needs just aren't comparable.

[AngelasDaddy0427]

I swear if Bush did this then I think he's a bigger moron then we all thought. It wouldn't matter how many gays were getting married if all of the people worried about it couldn't pay their rent.

[NUKE_CLEVELAND]

A lot of you aren't getting the whole deal with tax reform.

 

People below the poverty line would be exempted from paying anything and would no longer have money withheld from their paychecks. That would be a huge boon to them.

 

Prices would be lower across the board because businesses would have their tax burden lifted lessening the impact of any tax imposed. This has the added effect of helping to keep jobs here due to lower unit labor costs. Also foregin companies ( the japanese automakers come to mind here ) would want to locate more of their operations here.

 

The wealthy would also pay a lot more money. Under a flat tax there would be no more deductions for anything, no more tax shelters, no more cheating the system. In other words, all those rich people and corporations that hide their money offshore would no longer benefit from that and would have to cough up extra cash for their goodies they buy.

 

I dont believe this is something we should rush into but both sides agree that the tax code needs reform and I think it's certainly a goal worth pursuing.

 

SS2K4 What's your take on this?

[jackie hayes]

A lot of you aren't getting the whole deal with tax reform. 

 

People below the poverty line would be exempted from paying anything and would no longer have money withheld from their paychecks.  That would be a huge boon to them.

 

Prices would be lower across the board because businesses would have their tax burden lifted lessening the impact of any tax imposed.  This has the added effect of helping to keep jobs here due to lower unit labor costs. Also foregin companies ( the japanese automakers come to mind here ) would want to locate more of their operations here.

 

The wealthy would also pay a lot more money.  Under a flat tax there would be no more deductions for anything, no more tax shelters, no more cheating the system.  In other words, all those rich people and corporations that hide their money offshore would no longer benefit from that and would have to cough up extra cash for their goodies they buy. 

 

I dont believe this is something we should rush into but both sides agree that the tax code needs reform and I think it's certainly a goal worth pursuing.

 

SS2K4 What's your take on this?

No, I do get it.

 

This economic boom you envision won't happen. Yes, reducing taxes WILL help the overall economy in the short run. But I doubt the effects will be very large (can you show me a reasonable economic model that shows they will be? b/c I haven't seen one), and they would not in any case affect growth, it would be a one-and-done gain. It's not clear at all that prices will fall. Is that what you meant, or that inflation will fall? Either way, I want to see a coherent argument. Would net-of-tax prices fall, or just gross prices?

 

No evidence at all has been brought forth to suggest that these loopholes are so big that the wealthy would actually pay more, this is just populist rhetoric, which coming from the Repub party is called irony. In fact, since many of these plans involve large tax exemptions for savings, and the rich save a lot more than poorer households, I think the de facto tax cuts for the rich would be even larger than the nominal rates suggest.

 

The GOP sounds ridiculous -- 'The lower-middle class has such a hard time with all the complications of the tax codes, they'd be much better off with fewer complications and a higher tax rate.' Please.

[mmmmmbeeer]

No, I do get it.

 

This economic boom you envision won't happen.  Yes, reducing taxes WILL help the overall economy in the short run.  But I doubt the effects will be very large (can you show me a reasonable economic model that shows they will be? b/c I haven't seen one), and they would not in any case affect growth, it would be a one-and-done gain.  It's not clear at all that prices will fall.  Is that what you meant, or that inflation will fall?  Either way, I want to see a coherent argument.  Would net-of-tax prices fall, or just gross prices?

 

No evidence at all has been brought forth to suggest that these loopholes are so big that the wealthy would actually pay more, this is just populist rhetoric, which coming from the Repub party is called irony.  In fact, since many of these plans involve large tax exemptions for savings, and the rich save a lot more than poorer households, I think the de facto tax cuts for the rich would be even larger than the nominal rates suggest.

 

The GOP sounds ridiculous -- 'The lower-middle class has such a hard time with all the complications of the tax codes, they'd be much better off with fewer complications and a higher tax rate.'  Please.

Let me answer your question.

 

Theresa Heinz-Kerry made upwards of $5Million last year and paid in at an 11% tax rate.

 

I'm firm middle class and paid over 20%.

 

No need for reform, eh? No need to get rid of loopholes, eh?

 

I couldn't disagree with you more. The FACT of the matter is that low-income Americans will have a lesser tax burden due to the fact that all these folks with the money to find the loopholes will now be held accountable for their full income. This will increase tax revenues and lessen the burden on those of us who can't afford to find those loopholes.

[jackie hayes]

Let me answer your question.

 

Theresa Heinz-Kerry made upwards of $5Million last year and paid in at an 11% tax rate.

 

I'm firm middle class and paid over 20%.

 

No need for reform, eh?  No need to get rid of loopholes, eh? 

 

I couldn't disagree with you more.  The FACT of the matter is that low-income Americans will have a lesser tax burden due to the fact that all these folks with the money to find the loopholes will now be held accountable for their full income.  This will increase tax revenues and lessen the burden on those of us who can't afford to find those loopholes.

No, aggregate evidence. Anecdotes don't count. As I was once told by a teacher, If it's so obvious, it'll be easy to prove.

[mmmmmbeeer]

No, aggregate evidence.  Anecdotes don't count.  As I was once told by a teacher, If it's so obvious, it'll be easy to prove.

It's not an anecdote, she paid 11% in income tax last year. The GOP talking heads made sure that we all knew this too.

[Rex Kickass]

I think this would be a disaster for the economy. There is no way the price of a car is going to fall by 23% because taxes are reduced. Oh yeah, and they are talking payroll and income tax. Not corporate taxes.

 

And if the poverty line is the line to make certain people exempt from sales taxes - this would be a huge increase in taxes on families making under 50,000 dollars.

[DBAHO]

No, I do get it.

 

This economic boom you envision won't happen.  Yes, reducing taxes WILL help the overall economy in the short run.  But I doubt the effects will be very large (can you show me a reasonable economic model that shows they will be? b/c I haven't seen one), and they would not in any case affect growth, it would be a one-and-done gain.  It's not clear at all that prices will fall.  Is that what you meant, or that inflation will fall?  Either way, I want to see a coherent argument.  Would net-of-tax prices fall, or just gross prices?

 

No evidence at all has been brought forth to suggest that these loopholes are so big that the wealthy would actually pay more, this is just populist rhetoric, which coming from the Repub party is called irony.  In fact, since many of these plans involve large tax exemptions for savings, and the rich save a lot more than poorer households, I think the de facto tax cuts for the rich would be even larger than the nominal rates suggest.

 

The GOP sounds ridiculous -- 'The lower-middle class has such a hard time with all the complications of the tax codes, they'd be much better off with fewer complications and a higher tax rate.'  Please.

This is what we call an expansionary fiscal policy. This is when the government increases government expenditure or decreases taxes. It will shift the aggregate demand curve to the right. Expansionary fiscal policy can be used to increase real GDP and decrease the U/N rate in a recession.

 

Taxation is another tool of fiscal policy and can be used to alter the level of expenditure. It has a slightly different impact on the economy because a change in taxation will impact on disposable income and consumption.

Tax Multiplier = -MPC / (1 – MPC)

 

Changes in the level of tax revenue or transfer payments occur as the economy expands or contracts. For example, as the economy grows, employment increases as does tax revenue. Such an induced component of fiscal policy is known as an automatic stabilizer because it occurs automatically.

[jackie hayes]

It's not an anecdote, she paid 11% in income tax last year. The GOP talking heads made sure that we all knew this too.

Yeah, that's an anecdote.

 

Here, I did your research for you. According to the IRS, the rich do not on average pay a lower tax rate, and nothing close to 11%. Here's the Excel file: http://www.irs.gov/pub/irs-soi/02in03at.xls. (These data are for 2000-2002, and they apparently have not been updated for 2003.)

 

Btw, you didn't address the savings exemptions I mentioned.

[mmmmmbeeer]

Yeah, that's an anecdote.

 

Here, I did your research for you.  According to the IRS, the rich do not on average pay a lower tax rate, and nothing close to 11%.  Here's the Excel file:  http://www.irs.gov/pub/irs-soi/02in03at.xls.  (These data are for 2000-2002, and they apparently have not been updated for 2003.)

 

Btw, you didn't address the savings exemptions I mentioned.

Thanks for doing my research for me.

 

Although I have to ask the question, the loopholes allow citizens to manipulate their incomes to find tax shelters. Those manipulations essentially create a lower income. In other words, Heinz-Kerry's tax return may have said something like $2.5M income, yet she was legally hiding another $2.5M. She may have paid 29% on the $2.5M reported, but when adjusted for her actual income, the level would drop well below the 29% she should be paying. I don't know this for sure, I'm not an accountant and don't work in the financial world, this is just my perception.

 

As far as the savings breaks, most rich people's accountants already have their clients monies hidden in tax free accounts, I don't see how this will change things much.

 

EDIT:: What's the difference between "gross income" and "ADJUSTED gross income"?

[jackie hayes]

This is what we call an expansionary fiscal policy. This is when the government increases government expenditure or decreases taxes. It will shift the aggregate demand curve to the right. Expansionary fiscal policy can be used to increase real GDP and decrease the U/N rate in a recession.

 

Taxation is another tool of fiscal policy and can be used to alter the level of expenditure. It has a slightly different impact on the economy because a change in taxation will impact on disposable income and consumption.

Tax Multiplier = -MPC / (1 – MPC)

 

Changes in the level of tax revenue or transfer payments occur as the economy expands or contracts. For example, as the economy grows, employment increases as does tax revenue. Such an induced component of fiscal policy is known as an automatic stabilizer because it occurs automatically.

I do understand basic econ theory, trust me. Note that this MPC will depend on who is getting the refund, MPC for the rich is lower than MPC for the poor, so this tax multiplier will be relatively low. Since Bush (according to one report I read) wants the tax reform to be "revenue neutral", and the tax on the rich will be decreased, the effective, economy-wide MPC will decrease, and thus the multiplier along w/ it.

 

Then think about the long-term effects of government debt (commonly called the "crowding-out" effect -- also think about default risk, and fiscal/monetary policy interaction), and note that Bush's tax cuts will result in a large increase in the debt. It is more than debatable whether Bush's tax cuts are good for the economy, forget about fairness.

[jackie hayes]

EDIT::  What's the difference between "gross income" and "ADJUSTED gross income"?

Adjustments for AGI include alimony and contributions to certain types of savings accounts, but not itemized deductions. If Bush cuts off savings deductions, it may not be appropriate, but I haven't heard anything along those lines. Most of what I've read suggests that he'll exempt even more savings.

[DBAHO]

I do understand basic econ theory, trust me.  Note that this MPC will depend on who is getting the refund, MPC for the rich is lower than MPC for the poor, so this tax multiplier will be relatively low.  Since Bush (according to one report I read) wants the tax reform to be "revenue neutral", and the tax on the rich will be decreased, the effective, economy-wide MPC will decrease, and thus the multiplier along w/ it.

 

Then think about the long-term effects of government debt (commonly called the "crowding-out" effect -- also think about default risk, and fiscal/monetary policy interaction), and note that Bush's tax cuts will result in a large increase in the debt.  It is more than debatable whether Bush's tax cuts are good for the economy, forget about fairness.

Yeah there'll be both crowding out and int. crowding out.

 

Crowding Out – Expansionary fiscal policy increases the interest rate and so decreases all the interest – sensitive components of aggregate expenditure. The decrease in investment that results from an expansionary fiscal policy is called crowding out.

 

International Crowding Out – Expansionary fiscal policy leads to higher interest rates, which makes the dollar rise in value against other currencies, which decreases net exports. The tendency for expansionary fiscal policy to decrease net exports is called international crowding out.

[shagar69]

This is what we call an expansionary fiscal policy. This is when the government increases government expenditure or decreases taxes. It will shift the aggregate demand curve to the right. Expansionary fiscal policy can be used to increase real GDP and decrease the U/N rate in a recession.

 

Taxation is another tool of fiscal policy and can be used to alter the level of expenditure. It has a slightly different impact on the economy because a change in taxation will impact on disposable income and consumption.

Tax Multiplier = -MPC / (1 – MPC)

 

Changes in the level of tax revenue or transfer payments occur as the economy expands or contracts. For example, as the economy grows, employment increases as does tax revenue. Such an induced component of fiscal policy is known as an automatic stabilizer because it occurs automatically.

god damn, that post just reminds me how bad im doing in my econ class

[DBAHO]

god damn, that post just reminds me how bad im doing in my econ class

I had my macro-economics exam last week. That was copied straight from my study guide.

[kapkomet]

As a licensed CPA, if they get rid of the tax code, us accounting people won't have a job!

 

 

Seriously, a flat tax is a BAAAAAAAAD idea. I don't have a lot of time and I'm sure southsider will have a post fest on this tomorrow... him and I see pretty much eye to eye on this one. (seeing as how we had the same profs in college... what an edumacation we got.)