Quick Death for Tax Reform

Bloomberg is reporting Bush to Delay Major Push for Tax Overhaul.

President George W. Bush will delay a major push for revamping the tax code because administration officials concluded the changes are too tough to sell to the public and lawmakers, two people familiar with the matter said.

Bush instead will spend next year attempting to lay the political groundwork for fundamental changes in 2007 or 2008, the people said, and leave to Congress the task of tackling incremental tax code simplification in 2006, an election year.

The administration is wary of seeing its push to overhaul the tax system fall prey to the same factors that derailed Bush's attempt to restructure the Social Security system this year to include private investment accounts: negative public reaction and a Congress focused on the Iraq war and rebuilding the U.S. Gulf Coast from two hurricanes.

Postponing the tax changes would leave Bush without a focal point for next year's domestic agenda at the same time his Republican Party is attempting to maintain its majorities in the House and Senate. Other initiatives, such as making permanent the income tax cuts enacted during his first term and key parts of his energy plan, also are hanging in balance.

Learning from the battle over Social Security, the president may use the next year to generate public and congressional support for changing the tax code by stressing simplification and fairness, said a Republican who worked on the tax overhaul plans and spoke on the condition of anonymity.

The person and an administration official, who also spoke on the condition of not being identified, confirmed a story published yesterday by Time magazine that major tax changes likely will be put off until 2007 or 2008.

Bush hasn't mentioned tax code changes since his Advisory Panel on Federal Tax Reform issued a 272-page report Nov. 1 recommending two ways to overhaul the tax code. The proposals would reduce or eliminate many popular deductions such as those for mortgage interest and state and local taxes while reducing taxes on investment and abolishing the alternative minimum tax.

The silence stands in contrast to the fanfare with which the president announced the panel's creation in January. Then, Bush introduced panel Chairman Connie Mack, a former Republican Senator, and Vice Chairman John Breaux, a former Democratic Senator, in a ceremony at the White House.

Critical Reviews

While Mack, Breaux and the rest of the nine-member panel argue their recommendations as a whole wouldn't dramatically shift tax burdens, the proposals have been criticized by groups such as the National Association of Realtors, the American Council of Life Insurers and the Bond Market Association, which say tax breaks important to the interests they represent may be at risk.

The biggest flashpoints of the panel's recommendations are proposed changes to mortgage interest deductions. The proposals would restructure housing tax incentives now concentrated among higher-income people. No tax benefit would be permitted for interest on a mortgage of more than $412,000; the cap would be as low as $227,000 in some areas with cheaper housing. Current law allows a deduction for interest paid on mortgages up to $1 million for primary mortgages and $100,000 more for home equity loans.

Surveys and focus groups conducted for the Bush administration on overhauling the tax code found some enthusiasm until details such as altering the mortgage deduction were mentioned and began to draw objections, according to the person who has worked with the administration.

Bigger Changes

Some Republicans in Congress, including former House Majority Leader Tom DeLay of Texas and Senator Jim DeMint of South Carolina, have criticized the panel's work for not concluding a more radical overhaul is necessary. DeMint is proposing a tax code that would raise revenue from a 8.5 percent national sales tax and a 8.5 percent European-style value-added tax on businesses while eliminating income taxes.

Postponing the tax-overhaul proposal until 2007 will give the administration time to build consensus around a plan, said Clinton Stretch, director of tax policy at Deloitte & Touche LLP in New York. Stretch said that while he had not heard about plans to delay the tax changes, he's not surprised.

Flashback 2004

Two days after the election, in a press conference on November 4, 2004 president Bush said:

"Let me put it to you this way: I earned capital in the campaign, political capital, and now I intend to spend it. It is my style. That's what happened in the -- after the 2000 election, I earned some capital. I've earned capital in this election -- and I'm going to spend it."

Has anyone in history used up political capital so quickly with nothing to show for it?

• Social Security Reform - Dead On Arrival
• Tax Reform - Never got out of the gate
• Torture - Bush and Cheney split with McCain and openly support torture
• Iraq - Bush plan to "stay the course" is failing
• Immigration Reform - Republican infighting
• Polls - Bush support at 35% or so

One year in his second term and Bush is already the lamest of lame ducks.

There are of course two ways to look at this.
1) Tax reform is desperately needed and something has to be done about the AMT.
2) Tax reform may be needed but whatever Congress does will likely make matters worse. The best thing that can happen is nothing.

I was hoping for tax reform actually and thought the President's panel did a decent job with its recommendations. I would rather have seen a flat tax proposal but sensing that would be DOA I thought the recommendations were at least a start in the right direction. It seems that killing any part of the mortgage deduction just will not fly.

Apparently Bush does not have enough capital left to get anything done. Where did that capital go? The answer is out the window with a failed strategy in Iraq and a public that is just plain fed up with it.

We really do need tax reform, but like balance of trade, spending cuts, pension liabilities, trade agreements, deficit spending, the national debt, crop subsidies, health care costs.....

Once again, it looks like it's next year�s business.
So much for "Political Capital".

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/