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Last Updated: Tuesday, 1 November 2005, 09:22 GMT
Tax reform: Bush's next big idea?
Analysis
By Steve Schifferes
BBC News economics reporter

Tax return
Simplifying the 60,000 page US tax code is the goal
As plans to reform social security are fading, President George W Bush is hoping to get a boost from proposals to simplify the tax system. But the proposals are fraught with political pitfalls.

Soon after Mr Bush was elected to second term, he produced in his State of the Union address a bold programme of economic reform.

Its centrepiece was a plan to reform the US social security system, which pays pensions to millions of elderly Americans. Also in his sights was a fundamental reform of the US tax system, to make taxes less burdensome, fairer, and simpler to collect.

It was to follow on from Mr Bush's successful proposals to cut taxes in his first term, and enshrine his economic principles in the tax system for good.

'Third rail' of American politics

Social security reform was driven by concerns that the funding for the US pension system was under threat as a growing number of baby boomers are living longer and retiring earlier.

President George W Bush on the stump for social security reform
Bush argued private accounts will help save Social Security
However, Mr Bush's social security plan - which involved allowing younger workers to put some of the funds now paid to the government to fund retirees into individual, private accounts - ran into political turbulence almost as soon as it was launched.

Despite a spring campaign to persuade voters and Congressmen to back the idea, public opinion moved strongly against the proposal.

And concern over the response to hurricane Katrina administered the coup-de-grace to any Congressional action on the plan this year.

Social security again proved the "third rail" of American politics - touching the subject risks electrocution.

'Bait and switch'

Now Mr Bush is preparing to go back to Congress with a new idea - tax reform.

But before it has even been published, the proposals of the President's tax reform commission are stirring controversy.

The commission - which is chaired by former Republican Senator Connie Mack, with former moderate Democrat John Breaux as vice-chair - will now publish its recommendations on 1 November, four months later than planned.

San Francisco
House prices have soared in big US cities

The report is likely to recommend big changes in the US tax system.

It wants to simplify the number of different tax rates and reduce the lowest rate to 15%.

But to pay for those changes, it will propose the virtual elimination of most of the tax breaks enjoyed by many middle-income Americans.

These include mortgage tax relief, tax breaks to pay for private health insurance, and offsetting tax breaks for state and local taxes.

Some would be replaced by tax credits, but with strict limits on the size of the deduction.

Tax breaks "should be shared by all taxpayers," says Mr Mack.

Firestorm

The proposals have already set off a firestorm of criticism in Congress, not only among Democrats.

House minority whip Steny Hoyer says the plans are "a bait and switch"

"What the panel seems to offer with one hand, it apparently wants to take away with the other."

And Florida Republican Katherine Harris, where house prices are among the highest in the country, has joined with Democrats in criticising changes to mortgage tax relief.

"Reducing the interest deduction is a short-sighted attempt to balance budgets on the back of the middle class," she says.

Senators from the larger states with high taxes, like New York and California, are also furious that the proposals will impose a big tax increase on their citizens.

However, the panel looks set to upset conservatives by rejecting the most radical tax simplification of all - to abolish the income tax entirely and replace it with a national sales tax or VAT instead.

Peter Sepp of the National Taxpayers Union has already accused the commission of "failing to put forward a coherent statement that calls for something bold and different".

Main Street vs. Wall Street

The controversy over the tax reform plan has its roots in a deeper debate within the Bush administration - between the social conservatives and the fiscal conservatives.

Mr Bush's electoral coalition succeeded in uniting these two disparate groups.

But now both are restive.

The social conservatives have been upset by Mr Bush's abortive attempt to make his personal lawyer Harriet Miers a supreme court justice. The man replacing her as a candidate, federal appeals court judge Samuel Alito, may be more to their liking, but it is not yet guaranteed that he will fundamentally change the balance of power in the court, thus leading the way to challenge laws on abortion and other social issues.

And fiscal conservatives are concerned about the burgeoning budget deficit and the lack of restraint on federal spending in the first Bush administration.

For Main Street Republicans, who tend to be struggling homeowners, proposals such as simplifying the tax code by eliminating mortgage tax breaks are likely to prove highly unpopular, as they are already facing rising house prices and debt.

"We are starting to see some pain here," says Liz Ann Sonders, investment strategist at Charles Schwab.

Not a Conservative

Meanwhile, for some right-wing Republicans who are becoming increasingly critical of the president, the failure to include the radical tax-cutting plan that abolishes income tax, confirms their view that Mr Bush is not really a Conservative at all.

Bruce Bartlett, a former policy aide in the Reagan administration, has written that it is dawning on many Conservatives that "Mr Bush is not one of them and has never been".

In a sign of increasing controversy, he has been dismissed as a senior fellow at his the National Center for Policy Analysis, a conservative think-tank in Dallas.

The reason: his forthcoming book, entitled "The Impostor: How George W Bush Bankrupted America and Betrayed the Reagan Legacy."

In 1986, President Reagan passed a tax reform plan after two years of preparation which swept away many tax breaks and gained bipartisan approval.

On current form, it looks like Mr Bush will have a hard time matching his achievement.


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