Two weeks ago, the President's Advisory Panel on Federal Tax Reform issued its final report. Although our federal tax system is in dire need of restructuring and simplification, the panel's approach is a non-starter. It proposes a lot of pain for very little gain. The likelihood that it will form the basis for congressional action is virtually nil.
The panel proposed two alternative tax plans for restructuring the federal corporate and individual income tax systems. One is called the Simplified Income Tax Plan and basically keeps the income tax, while making a number of changes. The other is called the Growth and Investment Tax Plan. It is essentially a consumption-based tax system. However, the two plans have many features in common.
Among the most controversial elements in both proposals are elimination of the deduction for state and local taxes, a severe scale-back of the mortgage interest deduction and sharp limits on the exclusion for employer-provided health insurance.
In return, the Alternative Minimum Tax would be eliminated for both corporations and businesses, and there would be a small reduction in the top income tax rate. It would fall from 35 percent on individuals today to 33 percent under the simplified plan and 30 percent under the growth plan. The corporate rate would fall from 35 percent to 31.5 percent under the former, and 30 percent under the latter.
These are extremely modest benefits in return for very substantial pain for many taxpayers -- not to mention politicians. I know. I have written many articles over the years explaining why it would be desirable to do things the commission has recommended.
The mortgage interest deduction encourages families to overinvest in housing at the expense of other investments, such as stocks and bonds that would provide capital for business expansion and modernization. Ideally, we should level the playing field such that the tax code does not bias investment, so that capital can seek the best returns determined by market conditions, not the government.
The deduction for state and local taxes encourages states and localities to impose higher tax rates than would otherwise be politically tolerable. The deduction also encourages excessive consumption through local governments -- providing services, such as trash collection, that could easily be done by the private sector.
The exclusion for health insurance has deeply distorted the market for health care, encouraging people to consume far more of it than they would without a de facto tax subsidy.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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