WASHINGTON – President Bush's tax panel (search) on Tuesday endorsed a drastically simplified income tax system that envisions eliminating most deductions, credits, savings incentives and other tax breaks, replacing them with a few simpler benefits.
Taxpayers would pay roughly the same amount of tax under the simplified system as they do now, panel members said. But most of the confusing tax paperwork would be gone, and complex tax equations that baffle taxpayers would be simplified.
"I don't think it's a small move in this direction, I think it's a huge move," said Charles O. Rossotti, panel member and former Internal Revenue Service commissioner.
The White House made no commitment to stick to the panel's recommendation when forwarding its tax-simplification (search) proposal to Congress, a move Bush spokesman Scott McClellan said is not expected before next year.
"We're going to take into account all the work that they have done and the recommendations that they are making," McClellan said. "We share a common goal of reforming our tax code to make it simpler and fairer."
The President's Advisory Panel on Federal Tax Reform is tasked with making multiple recommendations for different tax methods that make income taxes a fairer, simpler and more economically productive system. Its final report is due Nov. 1.
The plan includes savings accounts for retirement and major family expenses very similar to a proposal put forward by President Bush.
The panel would shrink the number of income tax rates (search) from six to four and put 75 percent of individuals and families in the bottom 15 percent tax bracket.
The proposal abolishes the alternative minimum tax, a levy designed to prevent the wealthy from evading taxes but which is increasingly creeping into the middle class. Individuals would not pay tax on roughly three-quarters of the capital gains on corporate stock.
However, the federal tax deduction for state and local taxes paid would disappear — a proposal immediately denounced by a Democratic senator on the Senate Finance Committee, which has jurisdiction over tax legislation. Myriad personal and family tax breaks would be replaced with one family credit. Income tests designed to keep most current tax breaks within the middle class would be eliminated, letting wealthier individuals and families benefit.
Benefits and savings accounts for retirement, health and education would be eliminated in favor of three savings accounts, all funded with taxed income that would be allowed to grow and be withdrawn tax free.
One account would let workers save for retirement through their employers. Taxpayers could also put $10,000 every year into each of two accounts, one for retirement and the other for health, education and home-buying expenses. Low income taxpayers could get a savers credit worth up to $500.
The plan incorporates two ideas discussed at the panel's last meeting, when the commission's nine members decided that two of the biggest and most popular tax breaks benefit the wealthy more than moderate- and low-income families. One resulting change converts the mortgage interest deduction to a credit, while also limiting the size of eligible mortgages to the area's mortgage limit as set by the Federal Housing Administration.
It also caps unlimited deductions for health insurance that businesses provided to workers, setting the tax-free limit at $11,500 for families and $5,000 for individuals — the size of the benefit provided to members of Congress. Other fringe benefits for employees, like child care and life insurance, would be taxed.
It retains the earned income tax credit, a benefit designed to lift the working poor out of poverty, but gives workers the option of letting the IRS make that complicated calculation.
The panel also recommended a proposal blending that simpler income tax system with elements of consumption tax, promoted by some economists as the best way to spur economic growth. A key change would give businesses more investment incentives by letting them immediately write off the cost of new equipment.
"The whole economic pie would be larger," said James Poterba, a panel member and economics professor at the Massachusetts Institute of Technology.
A few members, however, had concerns that wealthy taxpayers with a lot of investment income would benefit most from some elements, such as a 15 percent tax rate on capital gains and dividends.
Sen. Chuck Schumer, D-N.Y., a member of the Senate Finance Committee, denounced the proposal, saying, "It's hard to conceive of something that could hurt New York more than the elimination of state and local tax deductibility. ... We will do everything in our power to defeat this pernicious proposal."
Elizabeth Garrett, a law professor from the University of Southern California, said she wanted to examine the amount paid by taxpayers at various income levels to be "at least content that we do no worse."