Panel delivers final recommendations for rewriting tax laws


Published: Tuesday, November 1, 2005 at 10:52 a.m.
Last Modified: Tuesday, November 1, 2005 at 10:52 a.m.

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.

Facts

Brief explanations of the two tax systems recommended by the President's Advisory Panel on Federal Tax Reform:

SIMPLIFIED INCOME TAX PLAN: Like the current system, this option levies taxes on individual and business income. The panel stripped out most of the tax deductions and credits available to taxpayers and added back only those that the panel members believed would encourage certain behaviors, such as saving, charitable giving or home buying.

The panel said it wanted to shorten tax forms and remove some of the mystery involved in tax calculations.

Changes to business taxes make small business tax calculations easier and help American corporations better compete in global markets, the commission said.

GROWTH AND INVESTMENT TAX PLAN: To individual taxpayers, this system would appear almost identical to the simplified income tax. But, because of changes in the way businesses would be taxed, it marks a shift toward a consumption tax. That means "moving the tax code closer to a system that would not tax families or businesses on their savings or investments," the panel said.

Businesses could deduct their capital spending and wages from taxation, but they would lose a deduction for interest payments. This consumption tax would act indirectly, unlike a national retail sales tax. It differs from a pure consumption tax by applying a 15 percent tax on capital gains and dividends paid to individuals, a modification the panel made to prevent wealthy taxpayers from getting a much larger benefit than others.

Under the 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.

But 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."

The commission presents their findings to Snow, who 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.

Both plans 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.

The panel determined that tax breaks for homeownership and employees' health insurance could 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.

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 would create a new tax break for those who do not get health insurance through work.

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.

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