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    Breaux says commission faces taxing challenge

    BY Bill Walsh
    02/16/2005

    WASHINGTON -- President Bush's new tax overhaul commission will begin a daunting task today, complying with all of the guidelines the president has spelled out, the panel's vice chairman said Tuesday.

    Former Sen. John Breaux of Louisiana said the nine-member commission will consider a wide variety of ideas for revamping what everyone agrees is an overly complicated federal tax code.
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    But Breaux said Bush complicated the commission's job by insisting that any recommendations can't cost taxpayers a penny more than they pay now and that two sacred cows of U.S. tax policy -- the deductions for mortgage interest and charitable giving -- must remain intact. Adding another distraction, even as the tax commission starts its work, Bush will push to make his 2001 and 2003 tax cuts permanent.

    "When you look at the president's instructions, that is a really hard challenge to meet," Breaux said.

    At its first hearing today, the panel will take testimony from Treasury Secretary John Snow and several scholars who are expected to sketch a broad array of tax change options. Bush ordered the commission to send its recommendations to the Treasury Department by July 31 so legislation can be introduced this year.

    A complicated process

    No one disputes that the federal tax code is confusing. By one estimate, it contains 12 definitions of "child," and Bush said Americans spend billions of hours a year filling out their forms. The panel will have to contend with outdated aspects of the tax code, such as the alternative minimum tax, which was intended to prevent wealthy people from sheltering all of their earnings but which has increasingly bitten into the middle class. It also will address emerging tax issues, such how and whether to tax Internet commerce.

    Even before the panel begins work, many observers are predicting it will steer clear of radical changes and instead propose tinkering around the edges of the existing code.

    "Based on conversations with congressional staff, most believe that what will ultimately come out of this is reform to the current system as opposed to replacing it," said Mark Garay, director of tax policy services at Deloitte Touche Tohmatsu, a global financial services company. "That is the thing that the pragmatists will tell you is doable."

    That hasn't stopped tax policy experts of all stripes from dusting off their ideas for the first hard look at national tax policy since the so-called Kemp Commission examined it in 1996. That panel concluded that the tax system was "impossibly complex, outrageously expensive, overly intrusive, economically destructive and manifestly unfair."

    Despite cuts since then in capital gains and a reduction in income tax rates, Jack Kemp, a former congressman, vice presidential candidate and leader of the 1996 panel, said things haven't improved enough. He said the highest individual tax rate, 35 percent, is still well above the 1986 top rate of 28 percent and that the U.S. corporate rate is the fourth highest in the industrialized world.

    Kemp favors replacing the income tax code with a single flat tax, an idea that has floated in conservative circles for years. The flat tax gained national attention when publisher Steve Forbes made it a central plank for his failed bid for the 1996 Republican presidential nomination. Flat-tax advocates once again see an opening, and Kemp, who runs a conservative think tank, has unfurled his "Scrap the Code!" banner.

    Another idea

    Some fear that the drive to overhaul the tax code will be overshadowed by the president's top domestic priority: Social Security. But Rep. Bill Thomas, R-Calif., who is chairman of the tax-writing House Ways and Means Committee, rekindled interest when he suggested combining the two.

    Thomas suggested doing away with the 12.4 percent payroll tax, which finances Social Security, and replacing it with a value-added tax. It would impose an ever higher levy at each stage of a product's production and finally be paid at the cash register. Value-added taxes among members of the European Union range from 14 percent to 25 percent.

    "Why use the payroll tax, which is a job killer?" Thomas said last month on NBC's "Meet the Press." "Why don't we . . . think about bringing in revenue in a way that doesn't punish the employer?"

    Taxes on consumption have gained traction as Americans' rate of saving has decreased. A 1999 analysis showed that Americans on average squirreled away just 2.2 percent of their income, a rate far below that in other industrialized nations. With the future finances of Social Security under pressure from coming baby boom retirements, Breaux and the tax reform panel's chairman, former Sen. Connie Mack of Florida, have both expressed an interest in boosting Americans' savings rates through tax policy overhaul.

    But any tax on consumption is likely to face opposition from Democrats, who say that would place an unfair burden on low- and middle-income people who can least afford to pay it.

    Maya MacGuineas, a scholar with the New America Foundation, has responded with what she calls a "progressive consumption tax" that would place the highest tax burden on people buying the most. It would impose no tax on the first $25,000 in purchases, a 10 percent tax on purchases between $25,000 and $100,000, and 15 percent levy on anything above that.

    "In effect, basic necessities would not be taxed, and luxuries would be taxed at a higher rate," MacGuineas wrote last year in the Atlantic Monthly. "The less you spend, the lower your tax rate would be."

    Any far-reaching overhaul plan would have to contend with the entrenched interests that have a financial stake in the existing tax code. In what could be seen as a warning shot, on the same day Bush announced the tax panel in January, the Business Roundtable, a coalition of 150 chief executives of large American corporations, fired off a letter saying a tax overhaul "should not raise net taxes on the business sector."

    Breaux, who spent in 32 years in Congress, developing a reputation as a pragmatist, said that whatever the commission does, one recommendation will stick to basics and call for making the existing tax code simpler.

    "Our job isn't to make the political cut, it is to look at everything and say, 'Here's the best idea,' " Breaux said. "On the other hand, you don't want to jump off the edge of a cliff and propose something that isn't feasible."

    . . . . . . .

    Bill Walsh can be reached at bill.walsh@newhouse.com or (202) 383-7817.

    by Bill Walsh on 2/16/05.