Tax reform not a priority

Tax reform not a priority this year

Jonathan Weisman and Jeffrey Birnbaum report that tax reform is no longer a priority in 2005: "Bush Expected To Delay Major Tax Overhaul" (Washington Post, 12-28-04, E01).

This is a take away message from the lack of attention paid to tax reform at the administration's recent economic summit. The fact that the position of Assistant Treasury Secretary for Tax Policy has gone unfilled for a year is also suggestive.

Weisman and Birnbaum report that reform, when it comes, may be "incremental" rather than "radical." Apparently there is lots of speculation that a reform proposal would draw heavily on ideas in "Option 5" from a 2002 Treasury tax reform study. Here are the elements of Option 5:

• "A lifetime savings account would allow each person to save up to $5,000 a year, shielding capital gains, interest and dividend income from all taxation. Unlike existing tax-favored accounts, the money could be withdrawn at any time for any reason. A family of four could shield $20,000 a year from investment taxation, and since few families could save that much, capital gains, interest and dividend taxation would effectively end for the vast majority of Americans, the Treasury study said." "
• "The plan would also repeal the alternative minimum tax, the parallel income tax system that was set up to ensure the rich pay taxes but that increasingly ensnares the middle class."
• "For low- and middle-income taxpayers, the standard deduction would be significantly increased."
• "The current four tax-filing categories -- married filing jointly, married filing separately, single and head of household -- would be simplified to just married couples and all others. The six current income tax rates -- 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent -- would collapse to four, losing the 28 percent and 33 percent brackets."
• "And corporations would be allowed to immediately deduct -- or "expense" -- from their taxes a portion of the cost of business investments, instead of having to slowly write off those costs based on complex depreciation allowances."
• "To cover the cost of the tax changes, the plan would tax the value of an employee's health insurance benefit as if it were income."
• " "Most Social Security benefits" would also be taxed as income, the report says."
• "Finally, the plan eliminates the itemized deduction for state and local tax payments."

This is one of the reform options from the 2002 study; the administration's actual proposal is still many months away.