TCS Daily

A Taxing Agenda

By Pejman Yousefzadeh - August 17, 2006 12:00 AM

To paraphrase Marx and Engels: a specter is haunting the Bush Administration, the specter of a nonexistent popular domestic agenda.

Given the Administration's dramatic failure to push for Social Security reform last year, it would seem that it has shied away from dreaming big dreams when it comes to fashioning a general domestic policy agenda or a specific initiative that might give its domestic policy program some definition.

But there exists an initiative to be pursued that would significantly improve policy while at the same time allowing the Administration and Congressional Republicans to gain popularity with the electorate: tax reform. Talk of tax reform is at its peak at around filing time but in reality, tax reform shouldn't just be talked about during the month of April.

The Bush Administration should seize on the issue of tax reform, draft a package, and push along with Congressional Republicans for approval. In doing so, the Administration and Congressional Republicans will both help their political prospects and can significantly improve the nature of tax policy.

In fact, there are three major reasons why the Administration should pursue tax reform. They involve the three P's -- Politics, Policy and Personnel.


General frustration with the tax system, along with the belief that our current tax system can be replaced with something more workable, makes tax reform a potent and compelling domestic and legislative goal for the Administration and its Congressional allies to adopt.

The last serious tax reform package to have been adopted occurred 20 years ago during the Reagan Administration. Looking through the Wayback Machine, we find an October 26, 1986 New York Times article in which then-Deputy Treasury Secretary Richard Darman (who later served in the Administration of George Bush the Elder as Director of the Office of Management and Budget) analyzed the fight for tax reform as follows:

"A critical element, Mr. Darman says, was the public's rising alienation from the existing code. ''You knew there was a base out there of antipathy toward the current system, which was potentially a force for reform,'' he said. Second, ''the character of that antipathy toward the current system was partly, not exclusively, populist. This populist antipathy coincided with the election of a Republican President who, like Congressman [Jack] Kemp, demonstrated an ability to appeal to populist sentiment.''

Third, he said, a Republican President's seizing on tax reform - previously a liberal Democratic cause -would insure bipartisan support: In the process, a loose confederation of mostly younger liberal Democrats and populist Republicans would isolate traditional New Deal Democrats, who liked the progressive nature of the existing code but who would face the prospect of losing their partly blue-collar, partly populist constituency.

''In their minds, although not necessarily in reality,'' Mr. Darman said of the conventional Democrats, ''if they didn't do something on this issue, it threatened realignment. They feared that Ronald Reagan, Jack Kemp and the emerging populist wing of the Republican Party could take away a good portion of the 'blue-collar-slash-white-collar' alienated constituency that was traditionally Democrat. That is an incentive for a conventional Democratic politician to want to do something on this issue.''"

Darman's analysis largely continues to hold water. In 2006 as in 1986, there remains a base of antipathy towards the current tax system and that antipathy can be used for reform. Like President Reagan, the current President Bush has a demonstrated ability to appeal to populist sentiments and this ability will help in pushing a tax reform agenda.


But tax reform shouldn't be pursued just for crass political purposes. It should be pushed because, as a policy matter, the current tax system is in serious need of repair.

I have noted my arguments for tax reform in general and for the adoption of a consumption tax-based system here. To be sure, the consumption tax is not the only serious tax reform option on the table; indeed, the flat tax has much to recommend it. We can, of course, argue the specific merits of the consumption tax versus the flat tax as the debate for tax reform begins. What is clear, however, is that the need for reform is increasing daily. In an earlier column I noted:

"Allowing people to take home the full value of their paychecks will bring about another benefit -- increased worker productivity. This study, done jointly by Professor Edward C. Prescott of the University of Minnesota, and the Federal Reserve Bank of Minneapolis, demonstrates a powerful correlation between low marginal tax rates and high worker productivity. Additionally, the study finds that high marginal rates -- such as those found in European countries, don't even help fund the welfare states of those countries, because they end up reducing labor market participation, thus resulting in a less wealthy citizenry."

In light of reports concerning a general decline in worker productivity driven by a slowdown in the economy, it is important to craft a tax system that keeps marginal rates low. Additionally, a thriving economy will be especially helpful -- along with responsible budget-cutting and a commitment to restrain the size and scope of government -- in battling the growth of the federal budget deficit and national debt.


Personnel-wise, the current situation is a sort of perfect storm for the Bush Administration, one that may make it easier to pass a comprehensive tax reform package. The White House Chief of Staff, Josh Bolten, was Director of the Office of Management and Budget prior to taking the Chief of Staff position, and was a Deputy Chief of Staff for Policy before that. The Bush Administration has added a major player to its economic policy team in Hank Paulson, who left a lucrative and influential position as the CEO of Goldman Sachs to become Treasury Secretary. And the Administration now has former Congressman and Trade Representative Rob Portman heading up the Office of Management and Budget.

All three officials are heavyweights, well-versed in economic policy. They also know their way around political obstacles and pitfalls and can deal effectively and credibly with Congress on policy issues. In short, the President has in place a team that is primed to push for the successful enactment of a path-breaking and constructive economic policy package.

Why not use this talent, then? At the very worst, tax reform, even if it fails completely as a policy proposal, will be identified anew with the agenda of the Republican Party, bringing the President and Congressional Republicans short term political gain in advance of the 2006 midterm elections through identification with a popular legislative program. At the most, Congress, in an effort to show that it can get something done -- impelled by the desire to do right by voter sentiments and the need to craft workable tax policy -- will pass either a comprehensive tax reform package or get the ball rolling towards the enactment of one in the near future.

No one maintains that tax reform will be an easy project. But even a tax reform package that is pushed for in good faith but fails to pass will help the Bush Administration and Congressional Republicans politically. A successful tax reform package, one that is crafted to keep marginal rates low and to enhance long term economic performance, can only be a good growth strategy.

Pejman Yousefzadeh is a lawyer and TCS Daily contributing writer.


Anything from bush before election will fail
He has been so vilified by the press and the leftist-socialist-blame America crowd that he does nothing of substance domestically.

Even when he does have a good idea or begins to do something of benefit to the USA, he is quickly accused of "pandering to his base" by the lefties and he simply withdraws rather than fighting back.

Until he can get over his "compassionate conservative" self-image and tell his critics to pound sand and execute something of relevance over their objections, he will be as irrelevant as jimmy carter and his policies will be half-a$$ed at best.


Make a proposal
Three common complaints about US taxes are

1. They're too high.

2. They're too complicated (and expensive to calculate).

3. They tax the wrong people or the wrong things.

Tax "reform" should address 2 and 3 but not 1. The author proposes a "flat tax", which America has rejected over and over. He also thinks marginal rates are too high. But you can't lower everybody's marginal rates without lowering taxes overall, which is not tax reform.

If he wants to get serious about actual tax reform -- as opposed to making another Republican gift to the rich -- he needs spicific proposals that have a chance to be adopted. Otherwise it's just hot air. (Mark, that's your queue.)

Who rejected what? Tax Reality and Fellow Travellers.
The author proposes a "flat tax", which America has rejected over and over.

I don't seem to recall any public hearings or votes. Actually, the people that reject any lowering or simplification of taxes are:

1.) The super-rich, who benefit from extremely high tax rates with deductions for their favorite thing-think about Donald Trump advocating 70-90% marginal tates a few years back (but with deductions for real estate) when he was considered to have serious thoughts on public policy and not just be another aging has-been with bad hair and a cheesy TV show.

2.) Politicians who draw power from constant tinkering with the tax system, controlling the masses and picking winners and losers.

3.) Those parts of the professional compliance brigades-lawyers, enrolled agents, estate planners and accountants, who draw a living as navigators throught the legislative created thickets.

4.) Industries whose products draw significant value from their ability to reduce or delay the liability and or payment of taxes, such as life insurance companies, that sell a goodly bit of their product not for the obvious and noble purpose of keepin' widders 'n orphuns off the street, but to fund estate planning trusts and closely held business buy-sell agreements, etc.

5.) A certain percentage of so-called "not for profits " that keep a steady income stream coming in to pursue radical social agendas, not because of the nobility of their purpose but because people need deductions off their 1040 and private foundations have tax law imposed distribution requirements.

Each and every group gets up every day and laughs at the useful idiots that allow them to maintain their income and social status thanks to a tax system that not only is unfair, but eats up a significant part of its proceeds with administrative costs.

But hey, I'm just a CPA with experience in actually dealing with the business end of this crap, Liberal Goodman and the rest of the TCS Red Brigade have read Das Kaspital.

why am I not surprised that LG never thinks other people's taxes are too high
The last 3 tax cuts, as well as the last 5 tax increases have shown that lowering tax rates IS tax reform.

The last tax cut was not a gift to the rich. (I love the way liberals declare letting someone keep a small portion of their own money, is a gift.)

The percentage of taxes paid by the rich was higher after the tax cut, than it was before the tax cut. That's hardly a gift.

LG is upset because the rich are allowed to keep any of their money.

LG's agenda
is to raise other people's taxes, so that govt can spend more money on him.

Government Spending in Microcosm
A few years ago, I participated in an audit of a large MCO (aka HMO) that had a contract with my state to provide medical services to MA recipients.

As an aside-the way this is going, is to pay a fixed fee per month for each person to whom services are provided, a payment method known as "capitation". Of course, some individuals have conditions that make them more expensive to care for then the population at large, such as renopathy (kidney disease), HIV/AIDS and maternity and therefore additional payments above and beyond the capitation fee would be paid for individuals with those conditions. Our audit concerned maternity care.

Our state's public welfare dept., in the interest of ensuring good care was delivered from the get-go, decreed that if a pregnancy lasted beyond the first trimester, would pay the fee. The problem was, they never defined "first trimester" and data received in the form of International Code of Diseases (ICD-9)and Common Procedural Terminology (CPT-4)almost never provide information about the duration of the pregnancy.

Bottom line: The MCO could not prove 68% of the cases it billed were valid second or later trimester pregnancies. It would be nice to say the submitted sloppy data, but they weren't given these basics- despite the fact the program was governed by a 150 PAGE document outline requirements. Nobody in welfare ever stopped to ask how are we going to have data to audit (unless the physician makes a specific estimate of the duration of pregnancy, you don't get it) This is just one of many royal f-up by the agency that gets about 40% of our state tax revenues and "federal financial participation".

LG and his fixations
Why do you think LG so frequently taunts me to respond to him?
I'm guessing his ego has been stung by the frequency with which I show his arguments to be based on nothing but mythology and wishfull thinking.

A little slow this evening?
Being stung by a bee is annoying but doesn't hurt my big ego. Those aren't taunts, and you don't need encouragement to respond (you have 3 responses to my single post). "Otherwise it's just hot air. (Mark, that's your queue.)" is saving you the trouble of posting that I'm hot air -- which would be a typical MTG putdown. Why not just buzz of?

poor little LG
he just hates it when he's shown to be wrong.

He did not advocate a flat tax....but a consumption tax
"he author proposes a "flat tax", which America has rejected over and over" He advocates a consumption tax -- and one where the rich pay more than the poor do. The term 'flat tax' refers to a type of income tax proposed by Robert Ernest Hall & Alvin Rabushka over twenty years ago. Actually, it was just a recreation of the original income tax as it originally existed.

Get your rants straight, LG. :)

Our Current Tax Structure Distorts Almost Everything
It would be nice to read a policy discussion instead of personalities.

Payroll taxes increase the cost of labor, both directly and in compliance costs. People naturally avoid or evade these costs. Among other things,

They move jobs offshore.
They hire subcontractors who hire subsubcontractors who hire subsubsubcontractors who hire a couple of recent immigrants who have a small business.
They hire day labor off street corners.

NPR did a story in the early '90s where they gave the same information about a hypothetical family to ten different tax preparers. They got ten different tax returns. Are *you* sure that how much tax you pay does *not* depend on how skillful your tax preparer is?
The tax accounting rot infects other areas. Businesses have to consider the tax implications of everything they do. This distracts them from their real jobs. If creative accounting can save taxes, maybe it can save Enron!

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