Reprint permission from the April 1, 2002 issue of Crain's Chicago Business.
Mr. Bush didn't get all he wanted out of the tax bill that became law last month. The GOP backed off on repealing the corporate alternative minimum tax and accelerating the personal income tax cuts approved by Congress last year.
But the Democrats gave ground, too. They reluctantly agreed they wouldn't press for health insurance benefits for those who lost them because of the terrorist attacks or the economic downturn.
Congressional leaders on both sides of the aisle joined forces and hammered out a stripped-down stimulus package that combines extended unemployment benefits for millions of Americans with billions of dollars in business tax breaks. After three aborted attempts by Republicans to enact much bigger tax cuts, the bill was passed within 24 hours by overwhelming majorities in both houses and was immediately signed by President Bush, who can legitimately claim a healthy share of the credit.
There's a lesson to be learned, and it's easy to state: Although partisans will fight to the death over issues that divide them, they'll quickly build coalitions once they meet on common ground.
With that common-sense thesis in mind, I enthusiastically support the president's commitment to a simpler tax system.
But simplifying the tax code has been anything but simple. In seeking to prevent aggressive taxpayers from gaming the system, Congress and the Internal Revenue Service have gone too far and hurt the rest of us. And, too often, social engineers and special interest groups have championed their pet tax subsidies at our expense.
That's why, when Treasury Secretary Paul O'Neill recently promised a group of Chicago business leaders that the Bush administration will develop proposals to simplify the tax code, they urged him on. As that effort gains steam, I hope the secretary considers three proposals that rank high on my personal list:
Reform the alternative minimum tax (AMT). The point of this tax was to make sure that high-income individuals pay income tax, no matter how sharp their tax planners are. But the AMT is out of hand. By 2012, 34% of all taxpayers might be victimized by it. Let's index it for inflation so that only those who abuse the tax laws feel its wrath. Or, better yet, let's scrap the AMT altogether.
Revisit capital gains. Long-term capital gains can be taxed at six different rates. Let's select one of them.
Standardize savings incentives. Apart from employer-sponsored accounts, people can salt away money in individual retirement accounts, Roth IRAs, Coverdell education savings accounts and Keogh plans. Each has its own rules on eligibility, contributions and withdrawals. Using most of the same rules for all kinds of tax-favored savings accounts would simplify tax planning for retirement.
Some commentators are skeptical about Mr. O'Neill's resolve to simplify the tax code. They point to the administration's budget proposals and complain that, under his watch, the Treasury Department has actually made tax compliance tougher. The Office of Management and Budget has estimated that U.S. taxpayers spend 6.1 billion hours every year on federal tax compliance.
There's no debate that the lion's share of that effort needs to be redirected toward increased productivity. Along with most other Americans, I'm counting on Mr. O'Neill to help make that happen.
Copyright © 2002 by Crain Communications Inc.