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Free Market Project

2/24/2006 3:48:20 AM

Updated 02/22/06

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A Simple Plan?
Media buy into panel’s ‘simplification’ of tax code, focusing on deductions ‘scrapped’ and, like the panel, avoiding real reform.

“The objectives of simplicity, fairness, and economic growth are interrelated and, at times, may be at odds with each other. Policymakers routinely make choices among these competing objectives, and, in the end, simplification is almost always sacrificed.”

 – report of the President’s Advisory Panel on Federal Tax Reform


CBS: American dream "scrapped"?
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CNN: Tax the rich!
Audio | Video

By Amy Menefee
Free Market Project
Nov. 9, 2005

Send this page to a friend! (click here)     The president’s bipartisan tax panel delivered a complicated proposal on November 1 that has been criticized and even denounced by members of both political parties. But that hasn’t stopped the media from embracing it as a “sweeping simplification” and a “vastly simplified tax system.”

     The panel offered two plans, both of which would kill the unpopular Alternative Minimum Tax – but beyond that, they only switch around the winners and losers in the game. Tax brackets, breaks and credits would be changed, but the fundamental income tax system would remain. The panel rejected ideas for major reform, such as a flat-rate tax that would be the same for all, or a sales tax that would do away with income tax entirely.

     Instead of explaining how the current tax code affects Americans or investigating ways to improve it, the media have primarily used the opportunity to fuel class warfare and scare homeowners into thinking their deductions are going away.

The Tax Panel used this illustration from Marina Sagona
to show how "simple" its new plans would be.

The ‘Least Important’ is the Most-Covered

     Even though only 35 percent of Americans itemize their deductions, which could include deducting interest paid on a home mortgage, reporters hyped the homeowners’ deduction as “one of the pillars of the American income tax system,” as CNN’s Casey Wian said on the October 14 “Lou Dobbs Tonight,” and a “mainstay of middle-class tax returns,” as CBS’s Susan McGinnis put it on the November 2 “CBS Morning News.”

     CBS’s Bob Orr praised the mortgage deduction on the “CBS Evening News” November 1, the day the panel released its report. Orr said, “It’s helped make the American Dream more affordable, and has been so off-limits to reformers it’s been called the third rail of tax politics, until now. The president’s tax reform panel wants to scrap the break on home mortgage interest.”

     Orr’s claim that a break for mortgage interest would be “scrapped” was only partially correct. Both of the panel’s recommended plans would replace the deduction with a 15-percent tax credit for mortgage holders across the board, which would benefit those who don’t itemize deductions. Kevin Hassett, director of economic policy studies at the American Enterprise Institute, pointed out in a November 7 article that “more than 70 percent of filers didn’t benefit from the mortgage deduction in 2002.”

     In fact, Hassett said, “these changes would significantly reduce the cost of housing for the majority of Americans, since most taxpayers don’t receive any mortgage deduction benefits.”

     But those facts didn’t stop CNN’s Daryn Kagan and Gerri Willis on November 7 from emphasizing the “very big deal” of the proposal to “deep six” the mortgage interest deduction. Willis said people were “really concerned,” to which Kagan replied, “Yes, understandably. That’s everyone’s big chunk … I mean, most people’s biggest chunk there.” Willis responded: “The biggest deduction and the biggest gift from Uncle Sam that you get.”

     Some journalists took the grim projections even further. CNN’s Lou Dobbs said on the October 14 “Lou Dobbs Tonight” that “it’s a change that would seriously injure the finances of most American homeowners.” In his November 1 report, CBS’s Orr said: “But critics warn house prices would collapse across the country, costing all homeowners billions.”

     Hassett also answered that assertion in his article, saying the panel’s plan “avoids exposing the market to a calamitous price decline.”

     Free Market Project adviser Dan Mitchell, the McKenna Senior Fellow in Political Economy at The Heritage Foundation, said the home interest deduction was “probably one of the least important” components of the panel’s proposal. He added that the media have done “a sloppy job explaining there’s going to be a credit replacing it” in the panel’s recommendations.

Some Losers, We Like
     Overall, Mitchell said, the president’s panel “dodged the fights that have to be fought if we want a better tax system for the country.”

     “The panel was clearly trying to play the class warfare game of not wanting to give the rich a ‘tax cut,’” Mitchell said, explaining that the panel was likely trying to avoid criticism from the media and from Democrats.

     Class warfare was the order of the day for the crew at CNN’s “Daybreak,” who took taxing the rich for granted on their November 2 show. Carrie Lee explained that the home mortgage cap for tax benefits would be lowered from $1 million to a more average home price in the panel’s proposal. That caught Carol Costello’s ear: “…when you said million-dollar homes, I said OK,” Costello said. “But then you said $212,000-homes to 400. That’s the middle class.” Lee replied, “Exactly. Exactly.”

     Deflating their idea that the middle class would suffer disproportionately, Fox’s “Special Report with Brit Hume” included an interview with tax panel chairman and former Sen. Connie Mack (R-Fla.) on November 1. Mack pointed out that “less than 5 percent of the mortgages in the country are above that cap. Less than 5 percent.”

     Of course, all the quibbling about home buying and who would have a greater incentive to buy ignored the larger issue: that the government continues to pick winners and losers in the economy. And the panel has attempted to do it merely by shuffling around tax credits to keep any proposal “revenue-neutral” – meaning tax rates won’t be lowered.

     “What they give you with the left hand they take away with the right,” Mitchell said.

Proposals for Real Reform
     Though the tax panel’s plans are only recommendations made by non-lawmakers, there are several bills currently in Congress proposing variations on the flat tax and the FairTax, a national retail sales tax that would replace the income tax. The FairTax bill in the House is sponsored by Rep. John Linder (R-Ga.) and has 45 House co-sponsors. But in covering the tax panel’s attempt at reform, the media largely avoided the details of actual legislation on the issue.

     The New York Times reported on July 21 that the panel was “considering sweeping alternatives that include a national retail sales tax, a value-added tax and a flat tax that would exclude taxes on interest, dividends and capital gains. But radical changes like those drew scant attention from the panel members …”

     Media attention to the “radical” ideas of tax reform has been scant recently as well. CNN’s Andy Serwer attempted to raise the issue of a consumption-based tax on the November 5 “In the Money,” though his guest was Treasury Secretary John Snow, who begged out of Serwer’s questions because he hadn’t yet finalized his report for the president.

Related Links:

Tax Panel Changes Wouldn’t Slam Home Prices

Tax Panel’s Report


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