On November 1st, 2005, the President’s Advisory Panel on Federal Tax Reform issued a 272-page report, detailing options for reforming the U.S. taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code. Ten years later, it is instructive to revisit this recent moment of bipartisan consensus around a path towards tax reform.
The President’s Advisory Panel on Federal Tax Reform was established by President George W. Bush in an executive order, issued ten months earlier. Previously, the Bush administration had championed significant tax cuts, which were enacted by Congress in 2001 and 2003. By 2005, the administration had shifted its focus away from the size of the federal tax burden and towards the structure of the federal tax system. As President Bush outlined in his executive order, the Panel was directed to craft a tax reform that would:
(a) simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws;
(b) share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and
(c) promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.
These three goals – simplicity, fairness, and economic growth – guided the efforts of the Bush Panel. Two additional considerations shaped the Panel’s tax reform proposals. President Bush had specified that all plans presented by the Panel be revenue-neutral, raising the same overall level of federal revenue. In addition, the Panel decided to design reform plans that were distributionally-neutral, preserving the same tax burden on each income group.
Ultimately, the Bush Panel released two detailed tax reform proposals. The first, called the Simple Income Tax Plan, would have consolidated and limited several deductions and credits, lowered the top individual rate to 33% and the top corporate rate to 31.5%, reduced taxes on dividends and capital gains, and repealed the Alternative Minimum Tax. The second, called the Growth and Investment Tax Plan, would have kept most of the first plan’s provisions, but also would have lowered the top individual and corporate rates to 30%, eliminated the deductibility of interest, and allowed for the full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of capital investments.
The same day as the Bush Panel’s recommendations were released, the Tax Foundation issued a response, expressing support for the Panel's recommendations, but also disappointment that it had not gone far enough:
The newly released report of the President’s Panel on Federal Tax Reform represents a big step toward simplifying the current system and moving away from taxing income to a consumption-based system. However, these plans do fall far short of the complete overhaul of the tax system that most reform advocates had hoped for. Moreover, because the panel was required to produce a “revenue neutral” plan and constrained itself to be distributionally neutral, both plans may not contain enough sweeteners to overcome the intense political opposition nor enough to build a groundswell of grassroots support across the country.
As we noted in 2005, it is not always easy to craft a tax reform plan that creates economic growth while raising the same amount of revenue and preserving the current distribution of the tax burden. This is because one of the surest paths towards economic growth is by lowering marginal tax rates, which tends to reduce federal revenues and benefit high-income Americans. Revenue-neutrality and distributional-neutrality are significant constraints on the ability of a tax reform proposal to create growth.
However, both of these constraints were probably necessary to achieve consensus from the members of the Bush Panel, which consisted of both Democrats and Republicans. And the Bush Panel’s recommendations serve as evidence that policymakers can arrive at a serious tax reform plan, even if they decide to sidestep the messy questions of who should pay taxes and how much revenue the federal government should raise. (Personally, I would have been quite happy with either of the Bush Panel’s proposed plans, no matter how unambitious, instead of the tax changes Congress has actually passed over the past ten years.)
Indeed, perhaps the most significant aspect of both reform proposals is that they garnered unanimous support from Democratic and Republican members of the Bush Panel. Today, while there is significant bipartisan consensus for the need for tax reform, it is less frequent that leaders of both parties actually coalesce around a specific tax reform plan. The Bush Panel was an important moment in recent tax policy history, because it provided one possible roadmap for a bipartisan tax reform agreement in the future.
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