The Bush administration is eyeing an overhaul of the tax code that would drastically cut, if not eliminate, taxes on savings and investment, but it is unlikely to try to replace the existing tax code with a single flat income tax rate or a national sales tax, according to several sources familiar with ongoing tax deliberations.
During his reelection campaign, President Bush piqued interest among conservatives and liberals alike when he said replacing the income tax with a national sales tax was "an interesting idea." Just after the election he signaled that tax policy would be a centerpiece of his domestic agenda, reiterating his pledge to name a bipartisan panel to draft a fundamental tax reform proposal. That sent conservatives scurrying into either the flat tax or sales tax camp to muster political momentum.
But before the tax panel is even named, administration officials have begun dialing back expectations that they will move to scrap the current graduated income tax for another system.
Instead the administration plans to push major amendments that would shield interest, dividends and capitals gains from taxation, expand tax breaks for business investment and take other steps intended to simplify the system and encourage economic growth, according to several people who are advising the White House or are familiar with the deliberations.
The changes are meant to be revenue-neutral. To pay for them, the administration is considering eliminating the deduction of state and local taxes on federal income tax returns and scrapping the business tax deduction for employer-provided health insurance, the advisers said.
As the tax discussion takes shape, "we're not talking about a replacement system," said a former White House aide familiar with the emerging policy.
White House aides warn that no decisions have been made. "The president believes the tax code should be simpler, fairer, and more conducive to economic growth and he looks forward to appointing an advisory panel to review options for reforming the tax code," White House spokeswoman Clare Buchan said.
"They [the panel] will be asked to review all options, to seek input from members of Congress, to hold public hearings and then provide advice to the Treasury secretary, who will provide recommendations to the president."
She said she expects an executive order laying out the panel's mission and naming its members by the end of the year.
But already, the contours of a tax plan are taking shape: lower individual and corporate tax rates and steps to broaden the base of taxation and promote growth by cutting taxes on investment.