TCS Daily

The Reform Term

By Kevin Hassett - September 3, 2004 12:00 AM

As expected, President Bush sketched his second term agenda in his acceptance speech last night at the Republican convention in New York. The two most ambitious commitments that he made were to the reform of Social Security and fundamental tax reform. Given his track record, there is a very good chance that each of these will be legislated in the next four years if he is elected.

For Social Security, the President gave a fairly precise description of his plan. First, his plan will not change benefits for retirees or near retirees. Second, the President favors voluntary personal retirement accounts for young people. Thus, the reform that he will pursue will likely offer people below a certain age a choice. They can continue with the current system, or they can allocate some percentage of their payroll tax into a private account. Presumably, the proportion that is allocated into the account would change future benefits taken from the old system.

This plan is less of a radical change to the system than full scale privatization. By allowing people the choice to keep the old system for themselves, it would also be difficult to turn such a plan into a political football. If private accounts are as popular as proponents expect they will be, individuals will increase the percentage of their payroll tax that they allocate to them over time, to the point that a dramatic change has been introduced. If they love the old system as much as opponents of privatization do, then they can ignore the private accounts altogether, and the program will remain effectively unchanged. It is hard to argue that choice is bad, so this casting of the reform seems quite reasonable.

For tax reform, the President was clearly motivated by the 1986 Tax Reform Act, something that has acquired a kind of cult status amongst tax geeks. Back then, Bill Bradley, Dan Rostenkowski, and Ronald Reagan put aside partisan differences and ironed out a revenue neutral reform that broadened the tax base and lowered marginal tax rates.

While that reform cleaned up the code significantly, it has moved in the wrong direction ever since. According to the background materials supplied by the President, the "short form" takes about 11 hours to prepare today, almost the same amount of time that the "long form" did 10 years ago. The Earned Income Tax Credit, the main tax subsidy for the poor, has 12 pages of instructions. And the Alternative Minimum Tax is capturing more Americans every year.

Accordingly, we have once again reached the point where reasonable people on all sides should be able to sit down, put aside partisan differences and clean up the code. To jumpstart that process, the President has proposed that an Advisory Panel on Tax Reform be assembled shortly after the election, and provide its advice as early in 2005 as is possible. This timing suggests that the reform may be pursued next year.

This idea is likely the best hope for fundamental tax reform since 1986. There are any number of honorable and able Democratic economists who could serve on such a commission and design a reform that significantly improves the code without any Republican input. Low hanging tax fruit abound.

One would hope that Democratic politicians would not encourage economists to undermine the efforts of the Advisory Panel, but that is the main risk of this approach. The recent Blue Ribbon panel on dynamic scoring (of which I was a member) created a nasty political squabble when Democrats decided that the Panel's Democratic economists were not being partisan enough and then demanded that more "reliable" economists be added to the panel.

By sketching the objectives of reform, but leaving the details out, the President has opened the door for sensible bipartisan cooperation in a way that a specific plan would not. The idea is so good, that one could hope that Senator Kerry would adopt it if elected.

So the fiscal policy distinctions between the candidates are now fairly clear going into the fall. President Bush will move Social Security toward personal accounts and push fundamental tax reform. Senator Kerry will increase government spending, raise marginal tax rates, and leave Social Security alone. That should give voters plenty to chew on.

Kevin A. Hassett is director of economic policy studies at the American Enterprise Institute.


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