Friday, November 5, 2004; Page A24

PRESIDENT BUSH laid out an ambitious domestic agenda at his news conference yesterday, promising tax reform and an overhaul of Social Security. Both goals are potentially attractive: A tax code with fewer loopholes would promote both economic growth and fairness, and private retirement accounts might foster a sense of ownership, perhaps boosting savings. But both reforms could also be damaging if executed badly.

The president says he will create a panel on tax reform that will report to his Treasury secretary as early as possible next year. The panel will be asked for proposals that simplify the code and reduce the administrative burden of compliance; close loopholes so that everybody pays a fair share and economic energy is not skewed inefficiently toward tax-sheltered areas; maintain some measure of progressivity; and boost job creation and growth. These principles are admirable, though it is unfortunate that the president insists the outcome should be revenue neutral. Mr. Bush has created a disastrous budget deficit, and his promise to halve it in five years, even if it were serious, ignores the challenge that lies beyond that time frame with the retirement of the baby boomers.

Aside from misguided revenue neutrality, Mr. Bush's tax reform might fall into other traps. The president couples his talk of eliminating loopholes with a promise to protect deductions for charitable contributions and mortgages.

The risk is that these exceptions will open the door to other supplicants, so that one loophole-ridden system replaces another. The president also may use the tax reform debate as an opportunity to end all taxes on interest and dividends, having already cut them in his first term, on the theory that this will boost savings and therefore investment and economic output. But if Mr. Bush is going to be revenue neutral, cutting taxes on savings implies raising taxes elsewhere; the net effect on growth might be more modest than the capital-formation lobby claims. And shifting taxes from savings onto income or consumption is almost certain to be regressive. That's especially misguided at a time when other economic forces are expanding inequality.

Mr. Bush's approach to Social Security reform is subject to similar caveats. He promises not to cut the benefits of people in or approaching retirement, and he opposes higher Social Security taxes; because the latter are regressive, he is right on both counts. He also favors private Social Security accounts that could be invested in equities, earning a return whose risk could be managed by holding a broad mix of securities and by the long-term nature of retirement funds. Giving people their own accounts is attractive philosophically. It might boost national savings by fostering a savings culture. And because mandatory contributions to private accounts could be offset by a cut in payroll taxes, the consequent reduction in taxation would boost incentives to work.

These advantages must be kept in perspective, however. The central issue in Social Security is that the nation has a commitment to future retirees that will force future tax rates up alarmingly unless preparations are made now. Either those future benefits must be cut or taxes must be raised as soon as possible to reduce the size of future tax hikes.

Designed well, private accounts could ease these painful choices: The possible boost to growth from extra work and savings could raise government revenue, offsetting the need for higher tax rates. The returns from equity investment could reduce the amount the government has to pay to ensure citizens a decent retirement. But a badly designed Social Security privatization could easily make the looming crunch worse. The administration may be tempted to win over opponents by topping up private accounts or guaranteeing investment returns too generously, so that reform creates a fresh drain on the budget. It may provide insufficient guarantees that lower-income elderly people and the disabled will not be left impoverished. Or it may allow its friends in the mutual fund industry to charge large fees for managing private accounts, again draining money from people who need it.

Mr. Bush's strength as a leader -- his ability to set big goals and stick to them -- has sometimes been undone by his weakness as a manager: Poor implementation undermines reasonable ideas. Maybe even more important, such fundamental reforms can win broad support only if implemented with a keen sense of fairness to all Americans, particularly the most vulnerable.