Tax Panel Says Popular Breaks Should Be Cut

NYT reported President Bush's tax advisory commission indicated on Tuesday that it would not propose replacing the income tax with a national sales tax or a value-added tax, but would recommend limits in the popular tax deductions for mortgage interest and employer-provided health insurance. The commission, scheduled to make its recommendations to the president by Nov. 1 on how to change the tax system, did not take votes or dwell on details, but its consensus on many important issues was clear. "We're getting focused on the income tax as a base," said the panel's chairman, Connie Mack, a former Republican senator from Florida.

Many prominent conservatives have argued over the years that the income tax is a drag on the economy and should be scrapped in favor of a consumption tax, a tax based not on what people earn, but on what they spend. But the commission members concluded that consumption taxes like the value-added tax used in Europe had more drawbacks than advantages.

How many of those drawbacks are really related to the tax itself, and how many are related to the fact that most of Europe is socialist.

Various proposals for a flat tax - an income tax with everyone paying the same rate - are still under consideration, said Jeffrey F. Kupfer, the commission's executive director. The proposals are to be discussed at a meeting next week.

At its last meeting, in July, the commission agreed to recommend abolishing the alternative minimum tax for individuals, a step that would cost the federal government $1.2 trillion in lost revenue over 10 years. With a mandate to develop a proposal for changing the tax system that is revenue neutral - meaning it neither raises nor lowers total tax receipts - the commission must find enough revenue to offset the amount now generated by the alternative minimum tax. That is mainly what led to an examination of ways to modify the deductions for mortgage interest and health insurance, two of the largest tax breaks now available to individuals. Together, the two deductions will cost the treasury about $250 billion this year, with the benefits going disproportionately to the most affluent taxpayers.

The alternative minimum tax does need to be deleted, but I am sorry to see how they are planning on replacing that revenue.

The commission members decided that another popular deduction, for charitable contributions, should be expanded rather than cut back. They are looking at how to give the tax break to taxpayers who do not itemize deductions.

Charity is good, but giving a deduction to someone who does not itemize deductions seems wrong.

President Bush is not committed to adopting the commission's recommendations, and the prospects in Congress of limiting the mortgage and health insurance tax breaks, sure to be politically unpopular, are uncertain.

Uncertain is a major understatement.

The panel's vice chairman, John B. Breaux, a former Democratic senator from Louisiana, acknowledged the political difficulty but said, "We've got to make bold recommendations without regard to politics."

Mr. Bush appointed the commission in January, largely so that Congress would concentrate first on Social Security. The panel was originally supposed to report on its recommendations in July, but the deadline was extended twice, first to Sept. 30 and then to Nov. 1. For mortgage loans up to $1 million, taxpayers can now deduct all the interest. One proposal discussed on Tuesday would cap the deduction at the maximum mortgage the Federal Housing Administration will insure. That level changes each year and varies depending on housing costs in each county, with a maximum loan limit now of $312,895 in communities where housing is most expensive and a national average of $244,000, according to the housing administration.

Let's make it a fixed amount for the entire country. Screw the blue states.

Another proposal under consideration was to change the interest deduction to a credit, meaning that taxpayers with the same size mortgage payments would get the same tax break regardless of what tax bracket they were in. A third idea was to limit the deduction to 15 percent or 25 percent of a taxpayer's mortgage interest payments. The wealthiest taxpayers can now deduct 35 percent of the interest. The panel members said they had not calculated how much revenue any of these proposals would generate. But the Congressional Budget Office reported this year that a $500,000 ceiling on the mortgage principal for which interest can be deducted would raise $48 billion over 10 years. The panel members agreed that any of these changes would have to be phased in gradually to reduce the financial disruption for homeowners.

In the case of employer-paid health insurance, the main proposal the panel discussed would limit tax-free premium payments to the average cost of the premium the government pays for federal workers. That is now about $11,000 a year for family coverage.

I may be wrong, but I suspect that most companies offering better healthcare than the government provides for federal workers would be companies forced to do so by unions. This would be interesting in labor negotiations if the company can say the government does not think we should provide more that $X

Under the current law, employers can deduct every penny they pay for health insurance for their workers, and the workers are not taxed on this benefit. The panel did not agree on whether the employers or employees would be taxed if a ceiling were imposed, but as a practical matter, there would probably be no difference.

I dont see how being taxed or not being taxed makes no difference.

The proposal the panel discussed would allow taxpayers whose employers did not provide health insurance to deduct the amount of the premiums they paid for themselves.

Good idea

The main proponent of the health insurance proposal, Timothy J. Muris, a former chairman of the Federal Trade Commission and a law professor at George Mason University, said limitless tax-free health insurance premiums encouraged workers to demand and companies to offer overly generous insurance and resulted in increased health costs.

I agree. That is why I would like to see the amount unions can force employeers to provide cut back.

Mr. Muris said he did not know how much revenue his plan would raise. The Congressional Budget Office calculated this year that a limit of $3,720 in tax-exempt premiums for an individual and $8,640 for a family policy would raise $706 billion over 10 years.

Mr. Mack and Mr. Breaux said the housing and health proposals they were considering would not raise enough to offset fully the cost of abolishing the alternative minimum tax. This left open the possibility that they would end up recommending a limit on the deduction of state and local income taxes, a proposal that would most likely cause a political uproar.

Conservatives have long hoped to get rid of the progressive income tax. When the commission began work, there were three main possibilities: a value-added tax, a national sales tax and a flat income tax. After discussing a value-added tax, which is assessed on each stage of production and eventually paid by consumers, the panel members concluded that this would be what Mr. Mack called a "money machine," meaning that politicians could raise it at will without political pain. The commission members also agreed that a value-added tax would be a disproportionate burden on middle-income taxpayers and would complicate the tax system. Mr. Mack asked the commission staff to draft a proposal for a value-added tax, but that seemed to be a formality. "I think it's going to be very difficult to get a consensus," he said.

I dont see how a VAT places a disproportinate burden on middle income taxpayers, but I think way too much accounting is involved. I think a sales tax is better than a VAT

As for a national sales tax, the idea was dropped after a commission member, Edward P. Lazear, a labor economist at Stanford University and the Hoover Institution, a public policy research center, reported that the sales tax would have to be as high as 87 percent on most goods and services if items like medicine, education, food and clothing were not taxed.

I think that is a good idea. It would show people how much the government was wasting, and would put pressure for smaller government.

A discussion of a flat tax at a meeting of the commission in July indicated that the panel would have difficulty reaching a consensus on the details.