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Tuesday, January 11, 2005

By Ralf Seiffe

This past Friday, President Bush issued an executive order establishing a national “Advisory Panel” to help him generate ideas with which to reform the Federal tax code.

The president deserves kudos for a fast start on one of his second term promises but, tax reformers should prepare for an August surprise. The commission’s charter and membership signals that any chance for imaginative changes in tax policy have died.

At first look, the president’s initiative appears to be a welcome stab at federal taxation.

He campaigned against the obscenely complex system and its debilitating effect on the American economy. His call for the Panel to recommend ways to simplify federal tax laws and to reduce the cost of compliance are welcome and fulfill his campaign trail promises.

This panel’s charter is to narrow the possible solutions to our tax miasma. When the Panel reports its work, their recommendations will become the focus of a great tax debate. Approaches that do not make the panel’s “short” list have no practical chance to be part of the debate.

The importance of any major tax change means all sorts of special interest groups will lobby the panelists furiously.

CBS Marketwatch reported that “minutes” after the panel was named, Senators Grassley (R-IA) and Baucus (D MT), twisted the first arms with letters urging the panelists stick with Congressional tax revenue estimating techniques, a clear attempt to forestall any real changes.

The Executive Order itself has several hints that “Flat Taxers” and “Fair Taxers” and just plain “low taxers” will be disappointed. The first clue is the report’s scheduling because the charter ostensibly calls releasing on July 31.

That will be a mid-summer Sunday when humid swampy, Washington is sure to be deserted---hardly a day to receive a centerpiece of the second term. Unless there is some plan to promote the recommendations in the context of what’s usually a slow news month, this looks like step one in the procedural banishment of any new plan and the eventual triumph of the status quo.

The Order itself provides several signs that tax-changing options will be under-whelming. “Revenue neutrality” is one.

Another is its call for solutions that “…share the burdens and benefits of the Federal tax system in an appropriately progressive manner…”. This is a license for so-inclined panel members to recommend an income tax that looks a lot like the current one.

This is bad news for supporters of a flat tax or of a national consumption tax.

By explicitly requiring the Panel to keep progressivity, it is hard to see how the panel members could seriously consider a very flat tax. To meet this holdover from the current system, exemptions would have to be created thereby diluting the advantages of a truly low-rate, flat tax.

Another omen is the order’s requirement that the Panel recognize the “importance of home ownership and charity in American Society.”

This can be construed to instruct the panel to concern itself only with policy that maintains tax consequences for paying one’s mortgage or giving to charities. Pre-conditioning home ownership and charitable giving to remain tax-favored makes it hard to see how those favoring a “no deductions” flat tax or even a consumption tax will make much headway with the panel.

Of course, flat and Fair tax advocates can argue their plans fit the president’s orders. Flat taxers could tell us that large personal deductions reduce or eliminate tax obligations on lower-income Americans and indeed are progressive. Consumption tax advocates will show how exempting necessities makes their plan progressive for lower-income folks.

For either of the reform camps to get on the “recommended list” this July, they need the support of at least one panelist.

The nominees are all distinguished Americans but none of the panelist’s resumes will immediately encourage reformers.

Of the nine, five are either career politicians or former, important government officials, including a former IRS Commissioner. Four others are academics without easily understood philosophical underpinnings. Only one, the chief strategist for a large brokerage firm, is clearly a “private sector only” participant.

What is clearly missing from the panel is an entrepreneur.

Not one of the panelists appears to have any experience in building a business from the ground up. It is not clear that any have first hand knowledge of how corrosive the tax code is on capital formation. Instead, the panelists are predominately public sector participants.

How the real reformers react to the presidents’ assignment and whether they can influence the panelists will make interesting watching over the next six months.

The president has covered himself by ordering public hearings giving the reformers a public opportunity to present their views. Nevertheless, anyone with an ounce bureaucratic experience will recognize signs that the “fix”---which is no fix at all---is in.

For a second term that promised so much, Friday’s announcement is a real heart breaker.

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Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader.