Constrained Tax Reform: How Political and Economic Constraints Affect the Formation of Tax Policy Proposals

On November 1, 2005, the President’s Advisory Panel on Federal Tax Reform (the Panel) delivered its report to Treasury Secretary John W. Snow. The bipartisan Panel was organized ten months earlier by President George W. Bush to study options to reform the federal income tax system in ways that would make it simpler, fairer, and more growth-oriented. The Panel recommended two tax reform plans: the Simplified Income Tax Plan, which is based on the current income tax system, and the Growth and Investment Tax Plan, which incorporates a tax on business activity that is similar to some consumption tax prototypes. Many aspects of the Panel’s recommended plans were greeted with praise. However, a number of commentators criticized the reform options because they did not incorporate reductions in statutory rates on a scale comparable to TRA86. This paper discusses how the economic and political constraints faced by the Panel presented different challenges than the 1986 reform effort and resulted in a substantially different approach to tax reform. We draw two conclusions that help explain the Panel proposals and should provide guidance for future reform efforts. First, the tax system as it has evolved over the last 20 years greatly shaped the Panel’s recommendations. Structural features of the current tax system, such as the AMT, phase-outs, and numerous expiring provisions, make it difficult to fashion tax reform plans that are likely to generate popular support based on rate reductions alone. Second, the constraints likely to be imposed on tax reform are different, and in many ways more politically difficult, than those faced by tax reformers during the 1980s. These forces create tradeoffs that make reducing tax rates less politically tenable than past efforts and, ultimately, affect the ability to garner popular support for tax reform.