[PEN-L:31603] time for tax 'reform' again

["Ian Murray" <seamus2001@xxxxxxxxx>]

Treasury To Pitch Tax-Code Changes
Package Designed To Simplify System

By Jonathan Weisman
Washington Post Staff Writer
Saturday, October 26, 2002; Page E01


The Treasury Department will soon produce a package of tax reform options
that will range from streamlining the tax code's definition of a child to
scrapping the corporate income tax, a senior Treasury official said
yesterday.

The package, due out as early as January, will compete next year with other
high-profile administration priorities, such as Social Security and Medicare
reform. But Treasury's top tax-policy official said a host of serious tax
problems may force Congress to act on a broad tax reform package soon.

"The way I look at this, we essentially have a tax system that's held
together by chewing gum and chicken wire," said Pamela F. Olson, the
assistant Treasury secretary for tax policy. "And it's not like it was
strategically applied either."

Tax reform has been a rallying cry for conservatives since the Republican
Party took control of the House in 1995. But Olson made it clear that the
Treasury would not be suggesting dramatic reform proposals like a flat tax
rate or a national sales tax, at least in the short run.

Instead, the study will present to President Bush some short-range proposals
to simplify the tax code, with longer-range options to radically transform
the tax system.

"We do have to build a new house, but for now, we need to repair the house
we're living in," she said.

All of the Treasury's 104 tax-policy analysts, along with some economic
policy experts, have been working on the report for nearly a year, Olson
said. They have worked with White House economic adviser Lawrence B. Lindsey
and R. Glenn Hubbard, chairman of the president's Council of Economic
Advisers.

One long-range proposal will be to replace the corporate income tax with a
value-added tax, which works like a national sales tax levied on business
and consumer purchases. That proposal is bound to face stiff opposition from
Democrats because it would shift some tax burden onto poor and middle-class
consumers.

Olson said the Treasury hopes to propose changes that would not reduce the
government's annual tax revenue but would change how that revenue is
collected.

Tax experts and economists involved in the study say the most detailed
proposals are likely to be small-scale suggestions toward simplification.
For instance, the tax code defines a child in five different ways, depending
on whether a taxpayer is claiming a child as a dependent, claiming the child
tax credit, filing for the earned-income tax credit, filing as a head of
household or filing for a dependent care credit.

Treasury will push its case for the adoption of a single definition.

The department also will suggest immediate changes to the corporate and
individual alternative minimum tax (AMT), a separate tax system enacted in
1986 to ensure that taxpayers who take multiple tax credits and exemptions
still pay some income tax. The system is increasingly ensnaring middle-class
taxpayers, a situation that will grow dramatically worse as the 10-year,
$1.35 trillion tax cut of 2001 is phased in.

The administration also is expected to suggest a major change in the way
businesses write off the cost of their investments. Instead of the current
system, in which businesses slowly write off the expense over several years,
the Treasury will probably suggest that businesses be granted a one-time
investment credit, according to a source familiar with the study.

And Olson said major changes are needed in the way corporations are taxed on
their foreign earnings.

Olson predicted that a confluence of growing problems will give momentum to
tax reform, which until now has been more of a political slogan than a
legislative agenda.

The growth of tax shelters for corporations and wealthy individuals, the
flight of some corporate "headquarters" to post office boxes in off-shore
tax havens and the growing disparity between the profit companies show the
Internal Revenue Service and the profit they show their shareholders have
made headlines, undermined the public's faith in the tax system and could
produce a popular groundswell for action, she said.

On top of that, the World Trade Organization has threatened to levy $4
billion in penalties on the United States if it does not eliminate subsidies
for exports. Bush has questioned the fairness of taxing corporate earnings
and taxing them again when they are distributed to shareholders as
dividends. And Congress has been clamoring to fix the AMT.

Rather than fix each of those problems piecemeal, the Treasury will push for
a larger tax-reform measure, Olson said.

Former senator Bob Packwood (R-Ore.), an architect of the last major
tax-reform law, in 1986, suggested that piecemeal changes would not work
anyway.

"If they're going this route, my advice is, 'Do not think little thoughts,'
" he said. "If you want to go for reform, think big." But he said any
tax-reform proposal will face an uphill climb toward passage.

For one thing, sources suggest, the administration may be divided. In the
past three weeks, the Treasury Department, IRS and White House have been
soliciting advice from conservative economists and tax lobbyists. Several of
those contacted say the Treasury is seeking nuts-and-bolts suggestions about
the egregious complexity in the tax code but Lindsey is angling at more
dramatic proposals, such as a flat tax.

Where Treasury appears concerned that any proposal not increase the federal
budget deficit, White House officials "don't seem to be too worried about
cost," said one prominent Republican tax lobbyist.

"They seem pretty naive about how difficult this proposition is going to
be," the lobbyist added.

One Democratic tax aide said the issue would get a big boost if the GOP
gained control of the Senate, an increased possibility after the death
yesterday of Sen. Paul D. Wellstone (D-Minn.) in a plane crash.

But even then, Bush will have to take the lead, said Sen. Charles E.
Grassley (R-Iowa), who would be chairman of a Republican-led Senate Finance
Committee. Grassley said his first priority would be making the 2001 tax cut
permanent.

But that package, which included expanded child and adoption tax credits and
new credits for education and child care, actually made the tax code more
complex, not less, said Rep. Robert T. Matsui (D-Calif.), a member of the
House Ways and Means Committee.

Grassley said the president is likely to make tax reform a major issue in
his 2004 reelection campaign, rather than pushing it in the next Congress.

"It's very difficult to bring up interest in something like a flat income
tax without a broad consensus," Grassley said. "I'm not going to spend my
time trying to educate the public. Only the president can do that."