South-Western College Publishing - Economics  
A Simpler, Fairer Income Tax?
Subject Income Tax
Topic Taxes, Spending, and Deficits
Key Words

Tax Code, Income Tax, Consumption Tax, and Flat Income Tax

News Story

Former Republican senator Connie Mack from Florida and John B. Breaux, former Democratic senator from Louisiana have been named to head a new advisory board aimed at restructuring the tax code. Mack will be the new group’s chairman and Breaux will be vice chairman.

The group is charged with the task of making recommendations about how to make the national income tax simpler, fairer and more conducive to economic growth. The president has asked them to present their recommendations in six months.

The move is related to Bush’s campaign pledge to seek a fundamental overhaul of the income tax code. However, President Bush has made it clear that there are certain areas of the existing code that are off-limits. Any tax overhaul will have to protect incentives for home-buying and charitable deductions to satisfy Mr. Bush. The biggest deduction in the current code is for home mortgage interest.

Options for reform include a consumption tax that would be based on what households actually spend their money on, and a flat income tax that would lower most rates while eliminating tax breaks. If the president pushes ahead with reform, it is likely to spark a hot political debate in Congress and attract armies of special interest groups.

Republicans tend to favor replacing the current complicated tax code with some type of a consumption tax that would apply to consumer purchases. Democrats favor a national sales tax similar to that proposed by House speaker, J. Dennis Hastert, or a flat income tax that does not allow deductions.

Democrats complain that the President has already killed fundamental tax reform. “They have essentially taken fundamental tax reform off the table by promising to protect two of the largest deductions,” said Bruce Bartlett, an economist at the National Center for Policy Analysis and a former Treasury official under President Ronald Reagan. Since the White House has already made it clear that their top priority is to overhaul the Social Security program, many observers are skeptical that any true tax code reform will become a reality during the second Bush administration.
Questions
1. Explain how a consumption tax differs from an income tax.
2. Discuss how a flat income tax would work.
3. Choose your position on either a consumption tax or a flat income tax and why you prefer it.
Source Edmund Andrews, “Bush Names 2 Ex-Senators to Consider Tax Changes”, The New York Times Online, January 9, 2005.

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