Individual Taxpayers and Federal Tax Reform : Testimony before the United States Senate Committee on Finance
In the next few years, several factors will push tax issues to the forefront of policy discussions. First, under current law, almost all of the Bush Administration’s tax cuts will expire at the end of 2010. A second factor is the rapid growth in the alternative minimum tax (AMT), which will increase the inequity and complexity of the tax system. A third issue is the expected increase in government spending over the next several decades. Despite these pressures on the system, tax changes are not inevitable, and achieving meaningful reformthat is, with substantial design improvementswill require strong political leadership. Gale’s testimony focuses on some overarching principles that should guide tax reform efforts.
Obama’s Loose Change
CBO says the deficit will reach $1.2 trillion this year. President-elect Obama says the red ink will continue to flow at this rate or faster “for years to come” unless policymakers “make a change in the way Washington does business.”
Obama is right, of course. And his words echo the message he used so successfully throughout the campaign. Change, he promised, that you can believe in. The problem is that the stimulus bill Obama is preparing mimics exactly the sort of cynical business Washington has been doing for decades.
It has become a drearily familiar formula: Democrats want to increase spending. Republicans want to cut taxes. So they compromise–by doing both. And arithmetic being what it is, the deficit explodes.
We may, in fact, be about to create the mirror image of what happened during the Bush Administration. In 2001, an ambitious new president rolled into Washington faced with a slowing economy, and armed with an aggressive new economic agenda and a promise to change the tone in the Capital. George Bush, of course, wanted to cut taxes. The then out-of-power Democrats wanted to spend more.
What happened? Democrats bowed to big tax cuts, and, according to CBO, revenues as a share of GDP fell from 20.9 percent in 2000 to 16.3 percent by the end of Bush’s first term. Despite his tough talk about bloated government, the President abandoned efforts to control spending. As a result, outlays ballooned from 18.4 percent of GDP to 20 percent. All the Inside the Beltway players came away winners, and the modest surplus Bush inherited turned into a deficit of 5 percent of GDP.
Oh, and by the way, only about half of that new spending was for the military. The rest went to domestic discretionary programs and entitlements such as Medicare and Medicaid.
Now the roles are reversed—the Democrats are in charge and the GOP is in the minority. And, to be sure, the economy is worse. But the story line is looking eerily familiar.
Obama suggests it will be different this time. He says that budget reform will fix all this—later. Today he appointed a White House aide to seek out waste and abuse. Sadly, we’ve heard all that before too. I await change that I can believe in.
The Blank Check Bailout
The Bush Administration has asked Congress to write the biggest blank check in the history of the planet. And Congress may very well do it.
The Administration’s proposal requires only semi-annual reports to congressional committees and explicitly exempts any bailout-related actions from judicial review. This has a whiff of the war on terror about it. “We are in a crisis,” the Administration cries, “and you must act now. Do not stop and think. Do not amend. Just approve what we say or we will blame you for what happens next.”
The Bush Deficit: "This is Going to be a Challenge"
To paraphrase the oily Captain Renault of Casablanca fame, we in Washington are shocked, shocked to find that deficits are going on here. To listen to the cries of outrage and dismay, one might think the Bush Administration’s latest projection of nearly $400 billion in red ink for the fiscal year ending on Sept. 30, and almost $500 billion for next year was unexpected.
Tax refunds aren’t as hefty as expected
Through April 9, the average refund was up $102 to $2,090, an increase of about 5% from refunds during the same period last year, the IRS says. Economists and tax analysts had earlier predicted the Bush administration’s $350 billion tax-cut package would boost refunds by more than 25%. The administration estimated the average refund would increase $300.
Economists are puzzled by the smaller-than-expected refunds. “It’s a bit of a mystery,” says Goldman Sachs senior economist Jan Hatzius.
Cynthia Latta, principal U.S. economist at Global Insight, says lower refunds could be caused by a stronger-than-expected stock market last year, which has led to higher capital gains payments. And households might have adjusted their withholding last year to account for the reduced taxes, she says. Other possible factors:
•The alternative minimum tax. The AMT, originally designed to prevent the rich from avoiding taxes, will affect an estimated 3 million taxpayers this year. The AMT vaporizes many deductions and credits, reducing or eliminating the benefits of last year’s tax cut. Among this year’s AMT victims: Vice President Cheney.
•Late filers. Some taxpayers who may be eligible for a big refund had to postpone filing their returns because of confusion over taxes on investment income.
Leslie Hershey, 42, of Armonk, N.Y., who does her family’s taxes using TurboTax software, delayed filing until this week because she wasn’t sure how much she owed on stock dividends. One of her financial institutions sent three corrections to her 1099s, the forms that report interest and dividends.
•The economy. Many taxpayers were unemployed or worked fewer hours last year, resulting in lower incomes and smaller refunds, says Mark Ernst, chief executive officer of H&R Block, the USA’s largest tax preparer. Refunds for Block customers are averaging about 5% higher this year than last.
Conversely, the Bush administration says an increase in some taxpayers’ incomes could have reduced refunds. “That would be great news for the economy, and it would mean benefits from tax cuts were even larger than expected,” says Treasury spokeswoman Tara Bradshaw.
While economists and the administration had been banking on higher refunds to provide a big stimulus to the economy in the first half of 2004, the economy appears to be doing fine without them. The government said Tuesday that March retail sales rose 1.8%, the best gain in a year.