Bush Tax Policy Revealed!

What the Bushies really think about tax reform.

At the Republican Convention, President Bush pledged that, if elected to a second term, he would create a tax system that is “simpler, fairer,” and “pro-growth.” He wasn’t very specific. It’s widely presumed Dubya wants to substitute the current progressive tax system with a flat tax, but all the White House will say is that Bush will appoint a bipartisan panel to make revenue-neutral recommendations to the Treasury secretary. Either Bush is stonewalling or he really has no idea what, if anything, he wants to do to change the tax system. Asked last weekend by an Ohio voter whether he supports a flat tax, Bush assumed the stance that he was just too darned open-minded to say:

I’m not going to prejudge the outcome. It’s certainly one option. I’ve been asked in a variety of venues, do you favor the sales tax, do you favor the flat tax. What I’m in favor of is changing the tax code to make it easier to understand and more simple. I think by simplifying the code, we will encourage economic growth. A complex code that is hard to understand and requires enormous amounts of paperwork and time and lawyers and accountants is really counter-productive to economic growth. So it’s going to be important for me not to prejudge the outcome, but I am not going to prejudge.

The problem with wanting the tax code to be “simpler, fairer,” and “pro-growth” is that it’s impossible to achieve all three at the same time. You can make the tax code simpler and more pro-growth by taxing everyone at the same rate, but that’s less fair because if Joe earns 10 times more than Sam, whatever percentage they both pay in taxes will pinch Joe a lot less than it pinches Sam. If your main concern is to make the tax system fairer, on the other hand, the best way is to make Joe pay a higher percentage of his income than Sam, to make Sam pay a higher percentage of his income than the next guy down the income scale, and so on, until you reach zero at an income level that allows a family to pay for the bare minimum required to survive in the richest nation on earth. But that certainly isn’t simpler, and it won’t foster growth (long-term growth, anyway) as fast as a lower tax on high incomes would.

Do not expect the Bush campaign to acknowledge these contradictions publicly anytime soon. But if you want to read a fairly candid assessment by the Bush administration of these and other problems inherent in a radical overhaul of the tax system, Ron Suskind has just posted a Nov. 2002 document summarizing the views of former Treasury Secretary Paul O’Neill, former Council of Economic Advisers Chairman Glenn Hubbard, and others who then served on Bush’s economic team. The options they considered were a flat income tax; a flat consumption tax; an “add-on value-added tax” (i.e., a flat consumption tax supplemented by a tax on high incomes); an “income value added tax with Social Security tax integration” (too complicated to explain—see the document); and minor tax reform accompanied by a reduction in the tax on capital income.

Although the document is the work of many different people advancing many different agendas, two points of consensus emerge:

1) There’s very little real concern about fairness, although there is some concern about how a perception of unfairness might imperil passage of the legislation. The principal goal is unashamedly to lower taxes on higher incomes.2) Despite the authors’ professed concern that the tax system reward hard work, the Earned Income Tax Credit, whose expansion during the 1990s was Bill Clinton’s most significant poverty-fighting policy, is offered as a prime example of the current system’s burdensome “complexity.” The Bushies don’t even pretend to favor an alternative way to help the working poor. Ironically, the EITC was originally a conservative idea because it encouraged people to get off the dole.

This doesn’t come as a huge surprise, but it’s nice to have the evidence.