Senate Finance Committee Chairman Bob Packwood (R-Ore.), in an effort to jolt life into the tax-overhaul effort, yesterday proposed to his panel a modified flat-rate tax system that would end all itemized deductions and tax all individual income at either 15 percent or 25 percent.
The plan apparently accomplished at least part of its purpose. Finance Committee members, who have not been enthusiastic about overhauling the tax code, described the private session as a constructive discussion of how best to restart the effort to rewrite the code.
The proposal itself, participants said, was given a surprisingly kind reception in light of its radical nature.
Among other things, it would tax capital gains at the same rate as wage and salary income and would end all itemized deductions, including those for state and local income taxes, charitable contributions and home mortgage interest. Individual Retirement Accounts also would be terminated, although a standard deduction and personal exemptions would be retained and increased.
Some elements of the existing system of corporate taxation would be retained, while the corporate tax rate would be reduced from the current 46 percent to 33 percent.
The panel is scheduled to meet again Tuesday.
Packwood described the plan -- which he called a staff proposal intended as a starting point for deliberations -- as "very simple, very easy to understand." Because it would allow no itemized deductions, it would permit individual tax rates to be low and still produce the same amount of revenue as the current tax code. Every senator who proposed adding back a deduction would be faced with the onus of raising tax rates as well, Packwood said.
"What he's going to do is extremely revolutionary and extremely controversial," said Sen. David H. Pryor (D-Ark.). "It was my impression it is a serious concept."
Packwood put the tax-writing process on hold last Friday, when it became clear he would lose crucial votes scheduled for that day. The committee until then had concentrated on preserving or creating tax breaks. Amendments had drained Packwood's original tax-revision plan of $29 billion in revenue over five years.
"I think the present process is dead in the water," said Sen. Lloyd Bentsen (D-Tex.). "I'm willing to explore [the new proposal.] I think it's going to take substantial change from what we're doing now to get started again."
He added, however, that he expects substantial opposition to termination of the deductions for home mortgage interest and charitable contributions. Other sources said several senators held out at the meeting for abandoning the tax-overhaul effort.
Among the Packwood proposals:
*There would be two tax rates for individuals, 15 percent and 25 percent, rather than the current set of 14 or 15 brackets with rates ranging fom 11 percent to 50 percent.
*The personal exemption for all taxpayers and dependents would be increased to $2,000, but would phase out for upper-income taxpayers. The standard deduction for those who do not itemize their deductions also would be raised.
*Items that are not now included in taxable income, such as health insurance premiums paid for by employers for workers, would remain untaxed. For years Packwood has been a supporter of tax-free fringe benefits.
*Changes made by the Finance Committee during the last few weeks in deductions for business investment, taxation of companies doing business abroad and foreigners doing busines here, and in accounting practices, would stay.
*Timber, an important industry in Packwood's state, would lose its preferential capital gains treatment, but retain other tax advantages. Oil and gas, another industry with strong representation on the committee, apparently would retain its tax advantages.
The plan would reduce individual taxes by $90 billion over five years and raise corporate taxes by $75 billion. Increases in excise taxes would bring in another $25 billion. Documents describing the plan indicated it would give low-income taxpayers a smaller tax cut than Packwood's original plan or the House-passed tax bill.