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Reforming the tax code

By Lou Dobbs

Lou Dobbs
George W. Bush

(CNN) -- Outlining his agenda for the next four years, President Bush said reforming the tax system is one of the main goals of his second term. But by offering few details, Bush has raised speculation that his administration might be considering radical changes, such as replacing the current progressive system with a flat tax on income or a national sales tax.

The president has made no secret of his plans to make his first-term tax cuts permanent. But he's also called the existing tax code "complicated and outdated," implying that he eventually wants to downsize rather than add to the 60,000-page document. To try and fix the mess, President Bush has promised to appoint a bipartisan tax-reform commission by the end of this year. The commission is expected to weigh sweeping proposals, including the flat tax and a national sales tax, as well as more incremental changes to the existing structure.

But two prominent flat-tax proponents say their simple solution to the unwieldy tax code is still far from the realm of reality.

While the flat tax has been part of the national dialogue for a long time, "the chances of us ever actually enacting a flat tax are virtually non-existent," said Bruce Bartlett, senior fellow at the National Center for Policy Analysis. Any fundamental restructuring "is going to require a multi-year effort of education and discussion and conversation and analysis that has really not even begun," he said. "I just think it's unrealistic to think we can do this quickly and without bipartisan support."

Daniel Mitchell, senior fellow at the Heritage Foundation, is more optimistic, but agreed that expecting a flat tax in next four years would be "an aggressive prediction." While "there's no question the administration has started down a path that is going to mean tax reform," Mitchell said the most likely outcome will be large incremental changes to the existing tax code.

One of the main obstacles to the flat tax, Bartlett said, is that people believe that a progressive tax system, in which the rich pay more than the poor do, is fairer. One of the key criticisms of the flat tax is that it would shift more of the tax burden onto people who earn less, while trimming the tax rate for the wealthy.

But Bartlett argues that the concept of fairness should be applied to the upper tier as well. "We have a system right now in which the poor pay nothing," he said, while the wealthy pay two-thirds of all federal income taxes. "Under those circumstances it's very hard to enact reform when you've decided at the beginning that you're not going to make anybody worse off," he said.

If the flat tax plan gains support from the commission and administration, the poor and middle classes will have an unexpected ally in their opposition: big business.

"I've given a couple hundred speeches on the flat tax over the past 10 years," Mitchell said. "By far the most hostile reaction I ever got was when speaking to tax lobbyists for Fortune 500 corporations," he said. "Big corporations have figured out how to manipulate the system, and that makes them very skeptical of trading the devil they know for one they don't know."

And there are several aspects of the current tax system that appeal to the common man, including the exemptions for mortgage interest and charitable deductions. Bush has already announced that he wants to maintain those incentives, which may already spell an end to the future of a true flat tax under his watch.

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