The New York Times reports today that the Bush Administration is unlikely to propose sweeping tax reform, but instead will seek incremental changes. No surprise there - they are already headed for big trouble, I think, in Iraq (obviously) but also on the Social Security reform front. Controversial fundamental tax reform would be a lot even for these guys to try. (It hasn't hit them yet, by the way, that just because they won almost every single political battle they fought in Washington in the first term doesn't mean that this will continue. I am reminded of Bertrand Russell's discussion of inductive reasoning, involving a chicken that reasons from past experience that every morning it will not be sent to the slaughterhouse. One morning, it is wrong.)
Anyway, here are the 5 main items that the Times article identifies as likely to feature in the incremental tax reform plan, with some quick reactions to them:
1) Eliminate the alternative minimum tax - Hard to quarrel with this one, since it doesn't even really have a better tax base, in many respects, than the regular tax. (For example, no personal exemptions adjusting for family size.) But of course this is immensely costly, said to be $660 billion over ten years. Repeal also would reduce progressivity, although less at the very top than at the lower six-figures range. In a different political environment, that would merely call for suitable adjustments to the rate brackets since whether we should have an AMT is a different question from how the distribution should work. By the way, a less costly alternative, although not one I advocate, is simply to raise the AMT exemption amounts and index them for inflation or perhaps even to the growth rate of the economy.
2) Expand tax-free savings accounts - I have come to favor a consumption tax, so in principle this might be fine, and again the progressivity effects could be offset elsewhere (although they won't be). But tax-free savings accounts without taxing dissaving (i.e., borrowing) could be a mistake. If I put $10,000 in a tax-free savings account, and finance the investment (although not traceably) by keeping my home mortgage $10,000 higher, I am not actually saving any more.
3) Eliminate state and local tax deductions - blue stater though I am, there is much to say for this, on the view that state and local taxes paid have some correlation, however weak, with the provision of untaxed consumption benefits provided by the state and local governments.
4) Increased income taxation of Social Security benefits - this is equivalent to means-testing for Social Security benefits, but by another name so people don't get hysterical. Fine with me, and note that it is one of the few politically conceivable ways of making better-off current seniors share in the pain of narrowing the fiscal gap.
5) Subject employer-provided health insurance benefits to income taxation - This really requires a blog all its own. I am sympathetic because it addresses the over-use of insurance to pay routine medical benefits. If car insurance were tax-free when employer-provided, we would probably see it paying for gasoline. The downside is that we may want to encourage more people to have health insurance, either out of paternalism (we think they are making a mistake if they don't have it) or because we figure we will have to pay for some of their treatment if they need it but are uncovered and out of cash. Some recent econometric research suggests that the bad effect, encouraging over-insurance for routine items, is bigger than the good effect, encouraging the purchase of some basic insurance for big items. So again I have a lot of sympathy although this is bound to be controversial. One last point - there might conceivably be hidden fiscal benefits, via Medicare and Medicaid, if healthcare consumers were forced to be more cost-conscious and this affected general treatment norms and product development in the healthcare industry. (I further discuss this point in my book on Medicare.)
Bottom line - the proposals certainly could be a lot worse, especially given what I have come to expect from the Bush Administration. But don't hold your breath that more than a couple of them (the revenue-losers?) will happen.