Changing tax systems
2/4/2003 12:00:00 AM - Bruce Bartlett
Every few years, interest in fundamental tax reform rises. The
leading proposal has long been a flat rate tax on a consumption base, such
as the Hall-Rabunshka plan. However, the interest always fades because the
transition from our current system is too difficult, both politically and
Consequently, in recent years, flat tax supporters have
concentrated more on incremental tax changes that would gradually move us in
the direction of a flat tax. If enough progress were made, then perhaps at
some future date we would achieve something close to it. Tax reformer Ernest
Christian has identified the key steps as the 5 easy pieces:
-- Lower income tax rates, especially the top rate, to get us
closer to a single statutory tax rate.
-- Increase depreciation allowances, so as to move closer to
immediate write-offs for investments in capital equipment.
-- Raise the estate tax exemption, and move toward repeal of
-- Relieve the double taxation of corporate profits, and move
toward full elimination of the corporate income tax.
-- Raise contribution limits for Individual Retirement Accounts,
Keogh plans and 401(k) accounts in order to get as much saving as possible
out of the tax base.
With last week's announcement that President Bush will propose
expansion of deferred savings, we can see that he has proposed all five
pieces, with three already enacted into law.
Like many conservatives, I was disappointed by the modesty of
the tax rate reductions proposed by President Bush during the 2000 campaign.
I was much more excited by the flat tax proposed by Steve Forbes and, to a
lesser extent, John McCain. However, I consoled myself that Bush would
propose something bolder after the election.
I was further disappointed when Bush sent Congress a plan
identical to his campaign proposal in 2001. This was a lost opportunity, I
thought. When it came time for compromise, Bush was bargaining from a weak
position. The result was that a modest tax cut became even more modest by
being phased in over many years. But again, I consoled myself that the party
split in Congress probably made this the best deal that could be obtained
under the circumstances.
Finally, I was disappointed that Bush didn't use his post-Sept.
11 popularity to push a meaningful stimulus plan through Congress. Instead,
he settled for a temporary increase in depreciation allowances.
I was heartened, however, when Bush decided to ask for full
elimination of the double taxation of corporate profits, rather than the 50
percent exclusion that was widely rumored. He correctly reasoned that he
could not be attacked any more severely by Democrats for asking for 100
percent of what he wanted instead of only half. Bush also now understands --
if he didn't before -- that Congress is always going to demand its pound of
Moreover, by asking for full elimination of double taxation,
Bush strengthens his hand by being able to argue the point as a matter of
principle. Had he only asked for 50 percent, his position would not be as
strong. And if forced to compromise -- a certainty -- he would be doing so
from a weaker position. With many Democrats, like Massachusetts Senator John
Kerry, favoring elimination of double taxation, they will have a harder time
doing so as Bush has framed the issue.
Now we see Bush asking for expansion of tax-deferred saving. On
Jan. 31, the Treasury Department announced that the president's budget would
contain an initiative that will allow Americans to save more for their
With this last proposal, we can now see that Bush has had a
strategy all along that conforms exactly to the five easy pieces. If he is
successful in getting relief for double taxation and further elimination of
saving from the tax base, he will have achieved meaningful legislative
progress on every incremental change necessary to achieve fundamental tax
One secret to President Bush's success is that he has always
been willing to settle for what he could get in terms of taxes, so long as
the principle is not compromised and it is enacted into law. Thus, he will
concede to long phase-ins, if necessary, and then ask for the tax cuts to be
speeded up. He is satisfied with such compromises because they always move
the law in his direction, and that is what is important.
By Bush's second term, it is possible that we will have made
enough incremental progress toward a flat rate consumption tax that we may
finally see fundamental tax reform fully enacted into law. If so, it will be
testament to a very clever, yet bold strategy that was initially invisible
even to people like me, who study such things for a living. I am impressed.