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Bush panel proposes broad tax-law changes

Chosen to find a simpler way to tax the nation, a presidential panel is set to recommend two designs that would rewrite virtually every tax law for individuals and businesses.
/ Source: The Associated Press

Chosen to find a simpler way to tax the nation, a presidential panel on Tuesday recommended two designs that would rewrite virtually every tax law for individuals and businesses.

Treasury Secretary John Snow called the propoposals “bold recommendations” but he did not indicate what ideas the administration would embrace.

“Their advice is the starting point, and I look forward to reading their recommendations and considering them carefully before I make a recommendation to the president,” Snow said in a statement.

Under the panel’s plan, most deductions, credits and other tax breaks would be eliminated along with much of the paperwork and equations that baffle taxpayers under a drastically simplified income tax.

Many, including the nine members of the presidential commission, have said key recommendations will be unpopular.

“The effort to reform the tax code is noble in its purpose, but it requires political willpower,” the group said Tuesday in a letter to Treasury Secretary John Snow. “Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts.”

Snow told the Detroit Economic Club on Monday the nation’s taxes need “not only theoretical reform, not only academic reform, but actual practical reform.”

The President’s Advisory Panel on Federal Tax Reform spent most of the year studying tax designs, including consumption taxes like a national retail sales tax. President Bush tasked the group with finding simpler and more economically productive ideas for taxation.

The commission wrapped up its work last month, and its ideas immediately attracted criticism — some from those who wanted to see more change and some from those who felt the changes went too far.

Drawing particular criticism, the panel determined that tax breaks for homeownership be changed to spread their benefits to more middle-income families.

The panel would convert the home mortgage interest deduction into a credit equal to 15 percent of mortgage interest paid. The $1 million limit on mortgages eligible for the tax break would shrink to the average regional price of housing, ranging from $227,000 to $412,000.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, said that idea is bound to be politically unpopular. “But its important to have a comprehensive starting point that will get everyone talking and thinking,” he said.

In another major change, taxpayers could purchase health insurance using untaxed money up to the amount of the average premium, about $5,000 for an individual and $11,500 for a family, a change that caps currently unlimited breaks but would create a new tax break for those who do not get health insurance through work.

Both plans would lower tax rates on individuals and businesses.

Under one plan, individuals would pay no tax on dividends paid by U.S. companies and exclude 75 percent of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15 percent.

Both proposals would abolish the alternative minimum tax, a levy originally drafted to prevent wealthy individuals from escaping taxation but increasingly reaching into the middle class. They also would eliminate federal deductions and credits for mortgage interest, state and local taxes and education, among others.

The advisory commission would replace those withdrawn tax breaks with simpler benefits, including three savings plans that supplant more than a dozen provisions currently available for retirement, medical expenses and education.

Bush set certain limits on the panel, requiring that the new plans collect roughly as much tax money as the government collects now.

The proposals also had to retain the progressive system that taxes wealthier taxpayers at higher rates than poorer individuals and families. They were also required to recognize “the importance of homeownership and charity in American society.”

The panel rejected frequently touted ideas to impose taxes on consumption, like a retail sales tax.

Instead, the group chose to use one recommendation to push for major simplification of the current income tax system. Its second recommendation makes changes for businesses that shift the nation’s tax system toward indirect tax on consumption.

The changes allow every taxpayer to use a simpler tax form, less then half the length of the current Form 1040. Snow said that would also cutting in half the number of taxpayers who need to hire a professional tax preparer.

The tax-writing House Ways and Means and Senate Finance committees pledged to take a close look at the recommendations.