Laying the first bricks for tax reform

A nine-member bipartisan panel on tax reform spelled out its recommendations Tuesday, hoping the White House and Congress might agree that its politically balanced compromises on changing the tax code would help people save more and borrow less.

Instead, the response of President Bush's Treasury secretary wasn't a warm endorsement, despite this being the president's Advisory Panel on Federal Tax Reform. And in Congress, where special-interest groups that now enjoy tax breaks hold sway over many legislators, the pea- shooters were taken out to knock down specific recommendations that would end or curtail those tax benefits.

That reaction is actually welcome, indicating that the group's nine months of work is spot on. Its recommendations could have been politely ignored, as is often the case with such committees. But Washington knows tax reform is on the horizon because the Bush tax cuts expire in 2008 and 2010, and some sort of red-blue compromise on a host of tax issues is most likely to happen by compulsion.

If either side is to get something it wants, it has to give up something. And on many of the tax issues facing the nation, this panel comes pretty close to finding a happy median.

The panel didn't address Bush's first-term tax cuts head-on, since its mandate was to propose "revenue neutral" reforms. But since one set of its ideas would greatly simplify the tax code for filers and create more incentives for entrepreneurship, investment, and saving, a likely outcome would be greater job growth and thus higher tax revenue.

The nation is long overdue for a major tax-code adjustment, since the last big reform was in 1986. Since then, the complexity has only grown as Congress has added thousands of special tax breaks in order to avoid new spending programs and because of high campaign donations from special interests.

Previous reforms also left untouched the alternative minimum tax (AMT), which was set up 36 years ago to make sure the loophole-seeking wealthy paid some tax. With inflation, however, the AMT has begun to hit couples with income as low as $75,000. Within 10 years, if not reformed and indexed to inflation, the AMT's two tax rates could effectively become a flat tax for many Americans and also undercut much of the Bush tax cuts.

To make up for the lost revenue in reforming the AMT back to its original purpose, the panel suggests an end to deductions for state and local taxes, and a curtailing of some tax breaks for higher-end mortgage interest and for employer-provided health benefits. Those last two changes would be aimed at the wealthy, but that hasn't stopped special interests from leading the charge against those necessary compromises.

Some of the panel's ideas may need adjustment. There's a favoritism toward stock investments over other kinds of investments. And while many tax forms would become very simple, it's not clear if the $130 billion now spent to help taxpayers fill out their tax forms would be greatly reduced.

But the groundwork has been laid for the president and Congress to now ignore many special interests and build on the balanced bipartisanship of this compromise plan.