Bush Plans Tax Code Overhaul

Bush Plans Tax Code Overhaul (WaPo)

The Bush administration is eyeing an overhaul of the tax code that would drastically cut, if not eliminate, taxes on savings and investment, but it is unlikely to try to replace the existing tax code with a single flat income tax rate or a national sales tax, according to several sources familiar with ongoing tax deliberations. During his reelection campaign, President Bush piqued interest among conservatives and liberals alike when he said replacing the income tax with a national sales tax was “an interesting idea.” Just after the election he signaled that tax policy would be a centerpiece of his domestic agenda, reiterating his pledge to name a bipartisan panel to draft a fundamental tax reform proposal. That sent conservatives scurrying into either the flat tax or sales tax camp to muster political momentum. But before the tax panel is even named, administration officials have begun dialing back expectations that they will move to scrap the current graduated income tax for another system.

Instead the administration plans to push major amendments that would shield interest, dividends and capitals gains from taxation, expand tax breaks for business investment and take other steps intended to simplify the system and encourage economic growth, according to several people who are advising the White House or are familiar with the deliberations.

The changes are meant to be revenue-neutral. To pay for them, the administration is considering eliminating the deduction of state and local taxes on federal income tax returns and scrapping the business tax deduction for employer-provided health insurance, the advisers said. As the tax discussion takes shape, “we’re not talking about a replacement system,” said a former White House aide familiar with the emerging policy.

But we’re supposed to be talking about a replacement system! This is disappointing on a number of levels. Not only does it do very little to alleviate the problems that Bush citied in the campaign–the incredible amount of time and money that simply complying with the current system consumes–but it actually strikes me as harmful. If we’re going to maintain a wasteful, complicated, incentive-laden system of wealth redistribution disguised as a taxing mechanism, surely incentivizing provision of health insurance is more advantageous than shielding real investment income from taxation.

FILED UNDER: Economics and Business
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Teri says:

    Scrapping the deduction for state and local income taxes will have states up in arms. One of the ways that they pacify residents about state taxes is “Well, at least they are tax-deductible.” People from high-income-tax states – highest in blue states – will be especially hard hit.

    Eliminating the tax deduction for businesses who provide health insurance for their employees is just insane. No business can afford to pay taxes on profits that they haven’t made – i.e., money that went to pay for labor costs.

    Pretty much the only other business expense that is not tax-deductible is 50% of entertainment expenses, which is a pittance compared to health care costs. I really can’t see any justification for putting health insurance in the same category.

  2. NJvoter says:

    It’s about time we repeal all taxes, and fund the government by borrowing. Hey Reagan proved that defecits don’t matter!

  3. Mark Smith says:

    What is the point to pushing deductions around in the current system? We desperately need a revolutionary change to our tax system, and a national sales tax like fair tax sounds like a great idea to me.

  4. Foobarista says:

    Gak! More diddling on the margins; how many middle-class people get dividends or cap gains outside their 401Ks anyway? This change would only further devalue 401Ks and IRAs, and ending the state tax deduction could seriously alienate blue-state Republicans.

    Go for the homerun and do a flat or consumption tax. If Russia and Bulgaria can do it, why can’t we?