When is tax reform not a good idea? When it makes the current labyrinthine system even worse. Unfortunately, that’s just what would happen if the President’s Advisory Panel on Federal Tax Reform has its way. What else should one expect from a nine-member panel that includes a former IRS commissioner, Charles O. Rossotti?
Appointed in January by President Bush, on Oct. 18 the panel endorsed slight reductions in the income tax rates, with the top rate dropping to 33 percent from 35 percent. The number of income tax rates would be reduced to four from six, and the alternative minimum tax would be eliminated. All to the good.
Unfortunately, the panel also wants to raise taxes on many Americans by reducing deductions.
Interest on only about the first $312,000 of a mortgage could be used to reduce taxes, compared with interest paid on mortgages of up to $1 million now, according to published reports. Aside from that, current itemized deductions would be turned into a 15 percent tax credit, so people in higher tax brackets who get a deduction of as much as 35 percent would lose their benefit.
We understand the logic of reducing rates and getting rid of deductions, but it’s usually not piecemeal like this “reform” but as a flat tax of about 12 to 15 percent, as has been proposed for years by Nobel economics laureate Milton Friedman and Forbes magazine publisher Steve Forbes, among others. That way the tax reduction is so large — with the top tax rate cut by more than half — that it makes up for anyone’s “loss” of deductions.
“The reform panel should have two simple goals: Make taxes lower, and make taxes simpler. Anything else quite frankly is insulting to the American public,” Rep. Ron Paul, R-Texas, wrote on LewRockwell.com. “But during several hours of discussion … , the … panelists talked about everything but those two objectives. Instead they embraced the practice of using the tax code as a tool for social engineering, debating what exemptions, credits and deductions should be tinkered with to steer taxpayers toward or away from certain activities.”
The panel is supposed to present its final report on Tuesday.
It’s unlikely to improve its recommendations.
But really, no panel is needed for tax reform. Just make permanent existing tax cuts that are set to expire, then further cut rates as much as possible.