President Bush has repeatedly stated that he has two primary domestic objectives as he enters his second term. One is his desire to allow workers to divert a portion of their Social Security taxes into personal investment accounts. The second is to simplify federal income tax laws to make them fairer and more conducive to economic growth.
There's been no ambiguity about the president's aspirations in these two areas. Both are highly controversial and would affect millions of Americans, from the poor to the wealthy. Bush is expected to name commissions to study both of these proposals and then make recommendations on how to implement needed changes. The latter, however, will be easier said than done.
The two congressional committees that have jurisdiction over changes in the tax laws also would consider proposed Social Security legislation. It appears highly unlikely that the House Ways and Means Committee or the Senate Finance Committee will take up debate on a new tax law before disposing of the extremely difficult matter of Social Security changes.
Compounding the president's problem in these matters is that his own advisers are not united on changes in the tax laws. And Bush has not, up to this point, indicated publicly the direction he favors.
It appears that questions about how to handle Social Security will be settled much quicker than changes in the tax laws. The options are more limited than those involved in changing the tax system, where quite a few possibilities will have to be debated. On Social Security, however, the basic question is whether to allow wage earners to divert some of their payroll taxes into investment accounts. If this doesn't pass muster, legislators can initiate some less draconian changes to ensure the financial stability of the system.
That could involve having Social Security payments kick in later than now scheduled, altering the payout schedule of benefits and/or raising the ceiling on when payments into the system terminate. Currently, workers make contributions only on the first $87,900 of earnings. This should be increased substantially. The formula that sets the contribution ceiling was established many years ago and is outmoded.
There are many options available for changes in the income tax, all highly controversial and fraught with potential political problems. The president could retain the current progressive income tax with lowered rates while repealing the wide range of deductions so that the new legislation would be fiscally neutral.
One option I believe Bush might favor is elimination of the income tax in favor of a flat tax on wages and salaries while exempting investment income. A third option in the debate is a national sales tax, which many Republicans seem to favor.
The Brookings Institution has analyzed what the consequences would be if a flat tax or a national sales tax were to be approved. It indicates that high-income households would be the prime beneficiaries of these forms of taxation as opposed to the current income tax. It concludes that low-income households would lose under the flat tax, and the elderly would be the prime losers if a national sales tax were to be put into effect. Low-income households, Brookings says, would also be losers under a national sales tax.
"For every winner there are bound to be losers," if the income tax laws are changed, Ronald A. Pearlman, an assistant treasury secretary under former President Ronald Reagan, told the New York Times. Pearlman was responsible for tax law revisions enacted in 1986. There's no question that some will gain while others will lose if the president sticks to his commitment that any changes will have to be fiscally neutral.
The president has set a challenging agenda. He has increased confidence as the result of his re-election and Republican gains in both the Senate and House, and appears eager to vigorously pursue his legislative aspirations. The outcome will be very interesting.
Murray B. Light is the former editor of The Buffalo News.