Attention Turns to Tax Reform

October 5, 2005

After an unsuccessful attempt at Social Security reform, the Bush Administration hopes to win over skeptics on reforming the income tax code. From Bloomberg News:

The Bush administration is beginning to segue from its failed effort to overhaul Social Security to rewriting the tax code, an issue that is fraught with its own political challenges.

President George W. Bush said yesterday said there is a “diminished appetite” for changing the way Social Security is funded, the first time he’s conceded congressional action is unlikely this year. His comments came four days after the White House directed its tax advisory panel, headed by former Senators Connie Mack and John Breaux, to recommend ways to revamp the tax code by Nov. 1, ending an indefinite delay in its work.

Changing the subject to overhauling the tax code gives the White House an opportunity to regain traction on its domestic agenda, analysts said. Bush created the panel in January and ordered it to propose ways to simplify the tax code in a way that makes it fairer and promotes economic growth without adding to the budget deficit.

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While the political odds of sweeping changes in the tax code seem small, political prognosticators also claimed the chances of tax reform were small in 1986. Despite this, however, the economic realities of the tax code are more certain. We know the current code heavily distorts decisions that consumers, businesses, and investors make everyday, making us less wealthy overall. We know the tax code is unnecessarily complex and most Americans favor simplification of it.

Unfortunately, it is likely that the debate will be framed in terms of the distribution of burdens before and after reform. Headlines such as “Group X will be hurt under tax reform” will likely dominate, ignoring the fact that tax reform’s purpose is not to redistribute income but to broaden the tax base, simplify tax rules, and lower average rates.

Tax Foundation Chief Economist Patrick Fleenor estimates that if the income tax base were broadened to include all sources of the income, we could raise the same revenue as the current system with a flat federal income tax rate of just 9 percent.

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