No income tax?

[bgramlich@xxxxxxxxxx]

FIRST: TAXES
A Man With a Plan
Bush will get his beloved tax cut. The real question: What's his true motive?
FORTUNE
Tuesday, May 27, 2003 
By Jeffrey H. Birnbaum 

Chalk up another one for President Bush. First he dispatches Saddam Hussein. Then he celebrates with a Top Gun landing on the deck of the U.S.S. Lincoln. Next he jawbones Congress into passing the third tax cut of his presidency. He even manages to slide in dividend tax relief, a feat almost no one thought he'd accomplish. And all in time to enjoy Memorial Day weekend at his Texas ranch. 

Although his tax victory is impressive, it comes at a cost. At best, the new bill is a Rube Goldberg contraption; at worst, a deceitful mishmash. Lawmakers tried to cram most of what the President wanted into a tax cut less than half the size he asked for. To do that, they cut all sorts of taxes temporarily. 

Why would Bush agree to this? Well, for one thing, it's nothing new; he accepted similar gimmicks in his 2001 tax cut. This time around, because moderate Senators in the President's own party worried about large deficits, lawmakers had to resort to even more "temporary" reductions. But since it's so much easier to cut taxes than to raise them, Democrats and Republicans alike suspect Congress will find a way to make these latest cuts permanent. 

Democrats have an additional theory about what's going on: Bush doesn't mind mucking up the tax code because it gives Congress an incentive to do what he really wants--to blow up the system altogether and replace the income tax with a tax on consumption. "If your goal is to get rid of the income tax, creating a variety of unnecessary complexities is a strategic advantage," says William Gale, a senior fellow at the Brookings Institution. "It gives people a reason to move to another tax system. Believe me, consumption tax advocates aren't losing any sleep." 

Democrats on Capitol Hill are beginning to take up the same chant. Representative Robert Matsui (D-California) says income tax complexity will soon "break open as a political issue." He predicts Republicans will use the controversy "to move to a value-added tax or something like it." 

The administration scoffs at this suggestion. "It's too Machiavellian, even for me," says a veteran Republican lobbyist. At the same time, no one doubts that the White House would love to alter the federal tax system so that it taxes consumption more and income less. This year's Economic Report of the President contains an impassioned pitch for a consumption tax and praises the exclusion of stock dividends from taxation as a helpful step in that direction. Bush's Treasury Department has conducted dozens of studies on ways to simplify or outright replace the income tax. These aren't academic exercises. 

Even Bush supporters acknowledge that the tax cut makes a hash of the code. For example, the bill reduces the tax on dividends and capital gains to a top rate of 15% through 2008. But in 2009, both rates pop up dramatically--to 20% for capital gains and as high as 35% for dividends. The per-child tax credit rises to $1,000 this year, only to fall back to $700 in 2005. As for all that heralded relief from the marriage penalty, it goes poof in just two years. 

Even if these tax breaks become permanent, consumers shouldn't rush out to spend their extra money. What the federal government is giving, strapped state and local governments will soon take away by raising their own taxes. Furthermore, while no one talks much about it, over the next few years the alternative minimum tax (AMT), which was meant to make the wealthy pay their fair share, will ensnare a growing number of middle-income families. By 2010, according to the nonpartisan Tax Policy Center, two-thirds of all taxpayers with two or more children will pay higher taxes because of the AMT. 

The Bush administration says it wants to correct the flawed AMT or get rid of it entirely. But protecting the middle class from its clutches would cost more than $600 billion. In addition, it will cost another trillion dollars to extend Bush's many temporary tax cuts over the years. No one knows where the money will come from. 

Which brings us back to the nefarious theory. Maybe the White House doesn't want to find the money at all. Former House Ways and Means chairman Bill Archer (R-Texas) liked to say that he wanted to "pull the tax code out by its roots." Knowing President Bush, he'd rather just take a bulldozer to it.