Tax Panel Teasers

David Rosenbaum provides an interesting preview of the anticipated November 1 report of the President's tax advisory commission in today's New York Times. He gives us the summary right up front:

President Bush's tax advisory commission indicated on Tuesday that it would not propose replacing the income tax with a national sales tax or a value-added tax, but would recommend limits in the popular tax deductions for mortgage interest and employer-provided health insurance.

To which I say good, good, and really good. I'll take them in order.

No national sales tax or value-added tax. If I were starting a tax system from scratch, I would look to a broad-based tax on consumption rather than income. But I'm not in that position, and the transition from the current system, in which there is deferred income waiting to be taxed, to a consumption-based system in which that income would have no way of being taxed, is too complicated to inflict on ourselves. The best approach now is to keep the income tax, while broadening the definition of income to allow the lowest possible tax rate on that income.

Limiting the home-mortgage deduction. Another fine idea. I wouldn't quibble with a policy like this that is designed to encourage homeownership. (And the White House is genuinely fond of its homeownership talking points.) But making that incentive a deduction rather than a credit and extending it to mortgage amounts that clearly pertain to the margin of "how big a house should I get" rather than "should I own my own house" are bad policy moves. They are not progressive, and they give back tax revenue relative to a pure income tax base that must be made up with higher tax rates elsewhere. So pare them back slowly.

Limit the exclusion of income taken as health insurance premiums from taxable income. I posted about this last December (here, here, and here). The exclusion favors those with high income relative to those with low income, because the latter have lower income tax rates and are less likely to have health insurance. How is that good tax policy?

The common thread in these two items is that look to raise revenue by limiting exceptions to the principle of taxing income that go disproportionately to higher income households. The article mentions the deduction for state and local taxes paid in the same vein. To that, I would suggest the subsidy to saving for college educations through 529 plans as another item that could be pared back.

Why the new focus on ways to raise revenue by broadening the income tax base? According to the article:

At its last meeting, in July, the commission agreed to recommend abolishing the alternative minimum tax for individuals, a step that would cost the federal government $1.2 trillion in lost revenue over 10 years.

The AMT, because it is not fully indexed, will become the default tax system for a growing number of households. Originally conceived as a way to limit the extent that a household with high gross income could reduce its tax bill through use of every exception from a pure income tax (like those mentioned above, and worse), the AMT has a broad base but is not itself a desirable tax system because it allows so few exemptions and deductions. It was designed for extreme cases (particularly in the pre-TRA 86 period when tax shelters were rampant), not for the typical household. Here's a good summary.

What the tax commission is proposing, in essence, is to scrap the AMT as a parallel tax system but to retain some of its elements to improve the tax system that affects most people. Based on the figures shown in the article, they are not quite revenue neutral. But this teaser of a report suggests that the commission has made a heck of an effort.

As for the partisan spin, I expect it to be severe, but I'm not going to pre-judge that either.

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