Bush plans to cut taxes permanently and overhaul tax system

WASHINGTON (AP) — Buoyed by a clear-cut election victory, President Bush is pledging to make permanent the sweeping tax cuts of his first term and to simplify the nation's tax laws.
The price tag on making the tax cuts permanent is more than $1 trillion, a daunting number in an age of record budget deficits.
At the same time, efforts to enact ambitious proposals to overhaul the tax system often fall victim to a ferocious assault from Washington lobbyists determined to protect special breaks for their clients.
While not discounting the challenges ahead, Bush's supporters are betting that the president will end up getting much of what he wants with the help of bigger Republican majorities in both the House and the Senate.
"Tax reform is a politically dangerous road to travel with a lot of corpses," said Stephen Moore, head of the Club for Growth, which supports an aggressive tax-cutting agenda.
"But the president is very serious about this. He wants to make a major push for overhauling the tax system," Moore said.
Moore and others expect Bush's model will be Ronald Reagan's successful effort to enact the 1986 tax overhaul, one of the broadest rewrites of tax law in history. It dramatically lowered tax rates and paid for those reductions by eliminating or scaling back tax deductions.
So far, Bush has disclosed little about how he wants to simplify the current system, which he has called a "complicated mess."
He first stated his tax overhaul goal in his August acceptance speech at the Republican National Convention. He promised that if re-elected, he would create a bipartisan advisory panel to come up with a "simpler, fairer, pro-growth system."
The idea did not attract much attention during the campaign against Democratic Sen. John Kerry. But last week, Bush put the idea front and center again, telling reporters at his first postelection news conference, "We must reform our complicated and outdated tax code."
Bush said any plan should be "revenue neutral," meaning the overall changes would not increase taxes or cut taxes. He also said the proposal should be viewed as fair without tax loopholes for special interests.
Bush indicated he favored protecting "certain incentives" such as deductions for mortgage interest rates and charitable contributions.
"It's going to take a lot of legwork to get something ready for a legislative package," Bush said.
He gave no hint about when he planned to appoint the members of his tax advisory group. The expectation is that none of the proposals will show up in the president's next budget, which goes to Congress in early February.
In August, Bush suggested that a proposed national sales tax was "an interesting idea that we ought to explore seriously." But the White House quickly backed away from the proposal, which Democrats contended would raise the cost of living for poor families while giving the wealthy a big tax break.
White House political adviser Karl Rove told NBC's "Meet the Press" on Sunday that Bush "wants to look at all options."
Some House Republicans, angered by how long it takes people to fill out their tax returns each year, are pushing the idea of replacing the current income tax. Alternatives could include a national sales tax, some other form of consumption tax, or possibly a simplified "flat tax," which taxes all income at a single rate and gets rid of deductions.
Many tax experts say it is unlikely that Bush will propose a national income tax or a flat tax. They say the president could offer a value added tax, a kind of consumption tax.
A value added tax is in effect a sales tax imposed at each level of production of goods and services and is widely used by European governments.
Supporters of this tax see advantages, especially if it were coupled with reducing or eliminating corporate income taxes. Those taxes are getting harder to collect in an era when multinational companies use various loopholes to avoid paying U.S. taxes.
"We need to look at all alternatives," said House Speaker Dennis Hastert, R-Ill., whose book this summer urged consideration of a national sales tax, a value added tax or flat tax to replace the income tax. Asked about the possibility of sweeping change to tax laws during Bush's second term, Hastert told "Fox News Sunday," "I think this is the only time in generations that you might have a chance to be able to do it."
Putting in place a value added tax is seen as a way of boosting the competitiveness of U.S. companies and encouraging them to keep their production facilities in the United States.
"The U.S. tax system is out of step with the rest of the world. We are the only major industrial country that does not have either a national sales tax or a VAT," said David Wyss, chief economist at Standard & Poor's in New York.
Bush's drive to overhaul the tax system could very well be coupled with a major revamping of the alternative minimum tax. This tax was designed to make sure the wealthy do not avoid paying taxes but which is ensnaring more middle-income taxpayers.
But such a fix would cost, by some estimates, more than $500 billion over 10 years.
When that is added to the price of making Bush's first term tax cuts permanent, the president is facing a revenue loss of around $1.5 trillion just on the tax side. His drive to partially privatize Social Security for younger workers carries an additional estimated $1 trillion in costs.
Bush will have to persuade Congress to put in place these costly programs at a time when he is under increasing pressure to deal with the soaring budget deficit, which hit a record $413 billion in 2004.
But Bush's supporters believe the president will benefit from political momentum gained in his re-election victory.
Bush apparently agrees. He told reporters last week when he laid out his second term agenda that he had earned political capital in the campaign "and now I intend to spend it."