Commission Recommends Overhaul of Federal Income Tax

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Wednesday, November 2, 2005

A presidential commission recommended changes in the federal income tax system that would lower rates, reduce paperwork and eliminate or scale back most tax breaks, including popular deductions for home mortgage interest and employer-provided health insurance.

Lawmakers and interest groups attacked several of components of the plan, which was presented yesterday to Treasury Secretary John W. Snow. But Snow said he hoped to refine the suggestions for President Bush by year-end and expressed optimism that Congress would enact a version of them.

"We will take the ball," Snow said. "It's our turn to run with it."

Tax experts and other analysts think the president, whose approval ratings have dropped significantly, might want to champion a new domestic initiative now that his effort to add private accounts to Social Security has stalled. As a result, they give a plan that purports to make the tax code simpler and fairer a decent chance despite its many vocal opponents.

Bush established the bipartisan panel in January and asked it to find ways to simplify the U.S. tax system in a way that would also promote "long-term economic growth and job creation." Snow quoted the president as saying earlier this year, "I really want bold, far-reaching recommendations."

The President's Advisory Panel on Federal Tax Reform worked for 10 months before unanimously backing two plans that differ primarily in how businesses would be treated. They both would streamline the tax system in many places, but they would also complicate tax benefits for wealthy individuals.

Both plans would decrease the number of tax brackets, bolster incentives for saving and investment and repeal the provision considered the current system's costliest weakness: the alternative minimum tax. The AMT was designed to force millionaires who took extensive advantage of loopholes and tax shelters to pay at least some taxes, but it now threatens to increase taxes on moderate-income families.

The first proposal, labeled a "simplified income tax plan," would reduce the number of tax rates for individuals to four from six and set the top rate at 33 percent, down from 35 percent. The second proposal, called a "growth and investment tax plan," would slice the number of individual tax brackets to three and set the top rate at 30 percent.

Both plans would consolidate the personal exemption, the standard deduction and the child care credit into a single "family credit." The earned income tax credit and related subsidies for low-income workers would be collapsed into a "work credit."

The long list of tax breaks now available that promote saving -- for education and individual retirement accounts, among others -- would also be simplified into three tax-free accounts: "Save at Work," "Save for Retirement" and "Save for Family." Low-income families would receive an additional "savers credit."

Such consolidations would drastically shorten the forms taxpayers use to file their income tax returns. Panel Chairman Connie Mack, a former Republican senator from Florida, claimed that millions of taxpayers would be able to convert their multi-page filings into a single, four-by-six-inch card printed on both sides. The model form he was waving in front of cameras, however, was 5 1/2 inches by 8 1/2 inches.

The extra benefits suggested by the panel, especially the rate reductions, would deprive the Treasury of billions of dollars a year. Ending the AMT alone would cost $1.3 trillion over 10 years. But the panel pledged that its plans would neither raise nor lower the federal budget deficit, which has lately exceeded $300 billion a year.


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