Question: How did you get chosen to serve on President Bush's tax panel?
Answer: It came completely out of the blue. I was contacted at the end of last year when I was grading finals and I got a call from the White House on my cell phone. I'm not completely sure how they knew about me, except that I had worked on both income and consumption taxes and I was someone who didn't need to be gotten up to speed. None of us on the tax panel are closely aligned with any vision of tax reform.
Q: But there are a number of political appointees.
A: Yes, but although some have political backgrounds the panel's chairman is former Sen. Connie Mack (R-Fla.) and vice chairman is former Sen. John Breaux (D-La.) none have political ambitions. It's very unusual for a panel. Three people in politics have retired voluntarily. Four are academics. Charles Rossotti is a former IRS Commissioner and Liz Ann Sonders is chief investment strategist at Charles Schwab & Co. I'm a Democrat but my work is not partisan work. I don't think anybody comes in with a strong ideological commitment.
Q: Why is tax reform so important?
A: It's long overdue and there are lots of improvements that need to be made. It's also one of the ways in which the government touches the lives of every American. We intend to do a lot to simplify the tax code for the average taxpayer and for small businesses. One of our functions is to try to take some of this enormous amount of material about taxes and get the information out to the public so they understand what's at stake.
Q: How do you keep the process from getting too politicized?
A: Our work on the tax panel is not politicized at all because we have the luxury of being able to figure out what we think the right options are. But generally, when proposals reach the Congress and executive branch, they do become political and that's just inherent in the lawmaking process.
Q: When should we expect tax reform?
A: Our report is due no later than July 31, and tax reform and Social Security reform are the two main domestic agenda items for the president. So the beginning of the process will be in the fall.
Q: Explain how the tax system really works these days.
A: Our current system is not a pure income tax system. We have a hybrid because there are lots of provisions that reduce the tax on savings, which is what a consumption tax does. Those include pensions, Roth IRAs, educational savings plans those aspects are aspects of a consumption tax.
Q: There are always stories of the very wealthy getting off because of loopholes in the system. Is there any justice in that? And will those loopholes be closed?
A: There certainly is a perception that the more sophisticated and wealthy are able to take advantage of the tax system. For example, deductions are worth more to people at the higher marginal rate. Lots of low-income Americans don't itemize deductions. I do think a system that has a lot of tax subsidies is susceptible to the concern that if the tax subsidy is not actually changing behavior if it's just a windfall to a particular group then it's unfair. We are going to look at that. Of course, dealing with tax subsidies is very difficult for Congress because there's always a group that wants them.
Q: Why are there so many loopholes?
A: People have always used the tax code to try to change behavior. Second, in the past two decades, the budget rules have encouraged people to use the tax system to implement policy, because it has been easier to change the tax code than to enact a federal spending program. The nice thing about enacting a tax benefit from a political standpoint is that it's in the code forever whereas appropriations have to be extended every year. It also can be more efficient if the subsidy is linked to income. I don't think every tax subsidy is unjustified but we need to take a hard look at them.
Q: In your opening statement to the panel, you talked about how taxes can be used to change behavior.
A: We have long used the tax code to encourage people and businesses to create value for our economy and society. We must keep in mind that tax expenditures are only justified when they actually change behavior in the way we intend to change it. It is not worth the revenue loss if a tax expenditure subsidizes behavior that would occur even without the tax incentive.
Q: How much real input will the panel have?
A: We've been given a lot of freedom and leeway. The president asked us to come forward with options for tax reform, including those based on the current income tax system. We were told that what we come forward with should be appropriately progressive when we talk about fairness, we're talking about some level of progressive rates. The president also said that we needed to acknowledge the importance of home ownership and charity. The home mortgage deduction was something we cannot touch. Former Secretary of State Jim Baker (now a special envoy to Iraq) told us to take account of political realities. We aren't trying to tilt at windmills.
Q: One big question is how to address the alternative minimum tax, which was designed in 1969 to ensure that wealthy individuals did not use excessive deductions. Why hasn't it worked?
A: I've been aware of the AMT as both a scholar and a taxpayer in California. By 2010, as many as 34 million Americans will be paying the AMT. It's not hitting people it was intended to hit. And it's complex because it's a hidden tax. Dealing with the AMT nightmare is going to cost money from $600 billion to $1.3 trillion.
Q: Will corporate taxes and offshore tax shelters come into play?
A: Corporate taxes are among the most complex. Charles Rossotti, in his book "Many Unhappy Returns," talks about some of the tax-sheltering activities. (IRS Commissioner) Mark Everson gave testimony on the various ways in which we tax businesses. I think we're going to be spending a lot of time thinking about how corporations and businesses are taxed.
Q: What's the panel's timetable?
A: This month the hearings are focused on the problems. We started with complexity and the next hearing in Tampa, Fla. will be on
corporate and business taxes. A hearing in Chicago addresses how taxes affect behavior and in New Orleans, we'll look at the fairness of the tax system. Our final report to the Secretary of the Treasury is due July 31.
Q: What was it like clerking for Thurgood Marshall?
A: He was, without question, the best lawyer of the last century. To listen to his stories, to hear about his practice as a lawyer, he is the justice that has done the most to bring equal justice under the law in the U.S.
Q: Tell us a little about the Iran-U.S. Claims Tribunal. How did it come about, and what did it do?
A: The Tribunal was set up under the hostage crisis. As you recall, we had put all of Iran's assets into escrow and that money was put in a fund that was available to pay U.S. citizens who had claims against Iran that came about after the revolution. In addition, the Tribunal heard cases between the two countries over contractual disputes. For example, we had agreed to sell certain military equipment to Iran under the Shah, and then we never delivered them. Unlike an appellate court, the arbitration was much more like a trial court. There were hearings with witnesses, and it was very different working with civil law lawyers from Europe and Muslim lawyers from Iran.
Q: How do you fit so much in, with your teaching duties and the tax panel?
A: The nice thing about having the tax panel last only a few months is that you can put aside a lot of your obligations for a short period of time. Because I was so active, I was released from my teaching duties. Now, when I walk through the halls at USC, people congratulate me. It's fun. And when someone asks me to do something else, I can always beg off by saying I can't do it because the president appointed me to this panel.
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