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By wire servicesCalling the proposal a starting point, leaders of the presidential panel acknowledge a tough road is ahead for it.
WASHINGTON - Declaring the income tax system "has become a running joke," a presidential panel on Tuesday recommended rewriting the nation's tax laws by eliminating virtually every deduction and credit and replacing them with simpler benefits for more taxpayers.
Treasury Secretary John Snow said he would study the report, which recommends two alternative tax systems and was issued by the President's Advisory Panel on Federal Tax Reform. Formal recommendations are expected to be presented to President Bush later this year.
Any substantive changes to the tax system will require new legislation and all but assure years of congressional debate and intense lobbying by business and consumer interests wary of change.
The advisory panel's chairman, former Sen. Connie Mack, R-Fla., acknowledged some recommendations would be tough to swallow politically. But he stressed the importance of the public and lawmakers examining the net impact of the proposed changes on the tax code and taxpayers.
Some observers questioned whether a comprehensive tax revision could be enacted any time soon, given Congress' preoccupation with hurricanes, war and federal budget deficits.
"The timing right now seems a little off," said Lindy Paull, co-managing partner at the Washington National Tax Services of PricewaterhouseCoopers and former chief of staff for the committee that advises Congress on tax matters. "To try to do something fairly comprehensive, I think, takes more than the time that Congress will have to devote to it next year because of the election."
Senate Finance Committee Chairman Charles Grassley, R-Iowa, praised panel members for taking an "apolitical" approach to the tax code, but suggested tough battles lie ahead.
"Some of their recommendations are bound to be politically unpopular," he said in a statement. "Cutting the home mortgage interest deduction is an example. But it's important to have a comprehensive starting point that will get everyone talking and thinking."
The nine members of the advisory panel said key recommendations would be unpopular.
"Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts," the group said in a letter to Snow.
Marginal tax rates would be lower for individuals and businesses under two alternative tax systems - one called the "simplified income tax plan" and the second dubbed the "growth and investment tax plan." Both plans were endorsed by the panel.
Both would eliminate most deductions and credits in an effort to simplify tremendously complicated calculations. For example, one proposed 1040 simple form would go from 75 lines to 32 lines.
The second of the two tax systems aims to reduce taxes on savings and investments made by businesses and families.
In place of tax breaks, the panel would create a few tax credits and three savings accounts that they said would encourage home ownership, charitable giving and saving while also supporting lower income workers and their families.
For taxpayers, those changes would shrink the length of their tax forms and reduce the need for professional help. Taxpayers at varying income levels would pay roughly the same amount of tax as they do now, the report said.
The panel sharply criticized lawmakers' tendency to use the tax code to promote their policy agendas, noting there had been 15,000 changes in tax laws since the last major rewrite in 1986.
Snow and the panel's members urged lawmakers and taxpayers to look at the package as a whole, not to concentrate solely on benefits lost.
Very quickly, however, the panel heard criticism of their decisions to limit or scrap deductions for mortgage interest, health insurance premiums and state and local taxes.
"Unfortunately, President Bush's tax panel is a Trojan horse, using so-called simplification to cut taxes for the wealthy while increasing taxes for middle-class families," said House Minority Leader Nancy Pelosi, D-Calif.
Sen. Jim DeMint, R-S.C., said the recommendations didn't go far enough. "We need comprehensive reform that will make America the best place in the world to invest and do business," he said.
"It's hard to see how they overcome some of the intrusions onto really pretty sacred territory," said Clint Stretch, director of tax policy for Deloitte Tax.
Mark Weinberger, a former Treasury Department official who is now Americas vice chairman at Ernst & Young, said successful tax reform requires taxpayers to look at the benefits of any new tax system, not just the costs.
"Tax reform is all about trade-offs. It's all about winners and losers," he said. "I think tax reform is absolutely going to happen. The question is just when."
Specifically, the panel said the mortgage interest deduction should be replaced with a credit worth 15 percent of mortgage interest paid, to spread the benefit to more homeowners of modest incomes. The panel also recommended lowering the $1-million limit on mortgages eligible for the tax break to the average regional price of housing, ranging from $227,000 to $412,000.
In one recommendation sure to generate a backlash in Florida, tax breaks for second-home mortgages and home equity loans would be eliminated.
In another major change, taxpayers could purchase health insurance using untaxed money up to about $5,000 for an individual and $11,500 for a family, a change that caps currently unlimited breaks but would create a tax break for those who do not get health insurance through work.
Both proposed tax systems would abolish the alternative minimum tax, originally drafted to prevent the wealthy from escaping taxes but increasingly affecting the middle class.
Under one plan, individuals would pay no tax on dividends paid by U.S. companies and exclude 75 percent of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15 percent.
Using a Treasury Department model that's contested by some lawmakers, the panel said both tax alternatives would spur economic growth and increase capital accumulation.