Tax Reform High on Bush Agenda

WASHINGTON – An energized President Bush (search), fresh from a re-election victory, says high on his priority list for a second term is tax reform.

"We must reform our complicated and outdated tax code. We need to get rid of the needless paperwork that makes our economy — that is a drag on our economy, to make sure our economy is the most competitive in the world," Bush told reporters during a press conference on Thursday.

While supporters suggest an overhaul rivaling the major reforms put in place in 1986 by President Reagan, the details may be a little harder to work out than the president wishes. Tax experts say reform could mean anything from making tax forms simpler to getting rid of the federal income tax. Furthermore, overhauling the tax system will bring major lobbying from outfits trying to preserve special breaks for their clients.

"We have a chance now, with President Bush's leadership, to simplify the way people report and pay their federal taxes. And it's high time that we take advantage of it," Rep. Chris Cox, R-Calif., told FOX News.

"Tax reform is a politically dangerous road to travel with a lot of corpses," said Stephen Moore, head of the Club for Growth (search), which supports an aggressive tax-cutting agenda. "But the president is very serious about this. He wants to make a major push for overhauling the tax system."

The president has not endorsed any specific plan, though he said during his August acceptance speech at the Republican National Convention (search) that he would create a bipartisan advisory panel to come up with a "simpler, fairer, pro-growth system."

Some House Republicans have suggested replacing the current income tax with possible alternatives, including a national sales tax (search), a federal equivalent of the state retail sales tax many consumers already pay.

Georgia Republican Rep. John Linder has a plan to set the national sales tax at 23 percent, which he claims would be enough to replace the funds that the canceled payroll tax would have raised. He added that low-income Americans would benefit the most because they would receive a rebate or "prebate" for the new 23 percent sales tax.

But critics say a national sales tax would hurt the poor, despite a rebate for lower-income families.

"The things you buy would cost more, but on the other hand, you would make more money because the government wouldn't be taking part of your income," said Chris Edwards of the CATO Institute.

Linder says his Fair Tax Act of 2003 (search) would abolish the IRS, creating in essence a $3 trillion to $5 trillion tax cut. The states would then be responsible for distributing these funds. Other supporters add that costs would not go up because companies set prices with tax payments in mind.

Another option the president may want to consider is a consumption tax like the value added tax (search). VAT kicks in at each level of production of goods and services and is widely used by European governments.

Supporters of this tax see advantages, especially if VAT were coupled with reducing or eliminating corporate income taxes. Those taxes are getting harder to collect in an era when multinational companies use various loopholes to avoid paying U.S. taxes.

Supporters of the VAT add that such a tax could boost the competitiveness of U.S. companies and encourage them to keep their production facilities in the United States.

"The U.S. tax system is out of step with the rest of the world. We are the only major industrial country that does not have either a national sales tax or a VAT," said David Wyss, chief economist at Standard & Poor's in New York.

One other possibility is a simplified flat tax (search), which levies all income at a single rate and gets rid of deductions. The lowest-income Americans would be exempt from paying the tax.

"There's a lot of concern now that rich folks, such as Teresa Heinz Kerry, can use all kinds of fancy tools to avoid some of her taxes and get a lower rate. That would end under a flat tax system. Everyone would face exactly the same rate, there would be no more loopholes," Edwards said, referring to Democratic candidate John Kerry's billionaire wife.

Opponents say the flat tax will eliminate so many popular tax loopholes — from mortgage interest deductions to charitable contributions — that the harm outweighs the benefits.

"If you believe in tax progressivity, that is, if you believe people who earn more money should pay a higher percentage of their in taxes than people who are lower income, then yes this will hurt lower-income people," Stan Collender of Financial Dynamics (search) told FOX News.

Any changes could include reforms to the alternative minimum tax (search) that was originally intended to keep the wealthy from skipping out on its share, but instead ended up hurting middle-income taxpayers. But some analysts estimate reforms to AMT could mean $500 million less in revenues over 10 years.

Tax experts say the most likely reforms will not involve a complete overhaul of the tax code. Instead, they predict simpler tax forms, elimination or reduction of taxes on savings and investment income, a possibility the president has listed as objectives, and an end to some tax loopholes for the wealthy.

The president has not yet endorsed any tax alternatives, although he did describe the national sales tax as an "interesting" idea during the campaign. His staff quickly tried to quash the notion that Bush would support such an overhaul.

Bush has made clear that whatever the revisions, they must not result in tax increases. However, making already existing tax cuts permanent will mean the government will not collect $1 billion to $1.5 billion in revenues. Trying to install Social Security (search) reforms to let young workers invest their tax could cost an additional $1 trillion.

That means Bush will have to persuade Congress to put in place these plans at a time when deficits are increasing and having hit a record $413 billion in 2004.

Bush supporters say the president will benefit from political momentum gained in his re-election victory.

"We need to look at all alternatives," said House Speaker Dennis Hastert, R-Ill., who published a book this summer that evaluates the options of a national sales tax, a value added tax or flat tax to replace the income tax.

"I think this is the only time in generations that you might have a chance to be able to do it," Hastert told "FOX News Sunday."

Bush apparently agrees. He told reporters last week when he laid out his second term agenda that he had earned political capital in the campaign "and now I intend to spend it."

FOX News' Megyn Kendall and The Associated Press contributed to this report.