NEW YORK (CNN/Money) -
For the first time in a decade, the House committee that plays a key role in crafting the nation's tax laws delved into the politically charged question of radical income tax reform.
The House Ways and Means Committee Wednesday held a hearing that addressed everything from replacing the income tax code with a system that taxes consumer spending to definitions of fairness, the trade deficit, and the need to fix a controversial tax known as the alternative minimum tax (AMT).
The hearing comes as an advisory panel President Bush established earlier this year prepares to recommend reform options before the end of July.
The president has made an overhaul of the federal income tax code a top legislative priority of his second term, together with Social Security and litigation reform. Bush has not yet endorsed any specific ideas, saying only that he wants a simpler system that's fair, promotes economic growth and doesn't increase or decrease government tax revenues.
Meanwhile, momentum is starting to build in Congress.
Last month, a Senate finance subcommittee took up the AMT, a parallel tax system that was originally intended to close loopholes for the wealthiest Americans but increasingly is hiking tax bills for middle income earners.
Bill Thomas, the California Republican who chairs the House committee, made it clear that the hearing was preliminary and necessary, given that nearly every American household would likely be affected by significant reform.
"As the one committee in the House that is charged with understanding and evaluating the product from the president's panel," said Thomas, "it's useful to begin an analysis of the kinds of criteria that would be useful in making choices based upon some of the panel's suggestions."
The last time the committee held a public hearing to discuss sweeping tax reforms was in 1995, although no dramatic changes to the code were made. In fact, the last time Congress restructured the nation's tax laws was in 1986.
Wednesday's hearing served as a reminder of why it's taken Congress almost two decades to consider any radical overhaul.
Charles Rangel, a New York congressman and the ranking Democrat on the committee, spoke of the need for bipartisan agreement while expressing skepticism that "we're going to come up with anything."
At the same time, Rangel suggested that Social Security and tax reform should be bundled together. "It might be that we're going to have one big reform package," he said.
Some of the policy discussions about Social Security reform and other retirement-related legislative changes would have tax implications.
Assessing the odds
Much of the hearing was a rehash of the public debate that started soon after Bush put tax reform on his economic agenda -- and mirrored hearings that took place this spring before Bush's Advisory Panel on Federal Tax Reform.
Joel Slemrod, a professor at the University of Michigan Business School, said it costs taxpayers every year $135 billion and more than 3 billion hours of their time to comply with the current code.
While there's a broad consensus that the tax system is broken, opinions diverge on how best to fix it and still achieve Bush's goals of simplicity, fairness and economic growth.
The five tax policy experts who spoke at Wednesday's hearing debated the merits of getting rid of the current code altogether and shifting instead to a system that taxes spending instead of income.
A move to a consumption-based tax code, either through a national retail sales tax, a flat tax or a European-style value-added tax, is supported by powerful Republicans in Congress. But even Thomas, the committee chairman, appeared to acknowledge the difficulty of such an extreme step when he pointed out how many government programs are structured around income tax laws.
Wally Herger, a California Republican, said the odds of eliminating the income tax code are "very, very slight," given the votes required in Congress and state legislatures.
William Beach, a director at The Heritage Foundation who appeared before the panel, agreed. "I see no likelihood of that happening in my lifetime, sir," he said.
The hearing provided further proof that the AMT is headed for massive change.
For the 2004 tax year, an estimated 3 million taxpayers owed the AMT, a separate tax system that essentially raises tax bills by disallowing common deductions allowed under the regular system. By 2010, that number is expected to exceed 30 million, or roughly one in three taxpayers.
"It's hard to believe that any fundamental tax reform coming out of the administration wouldn't involve some serious reform of the AMT," testified R. Glenn Hubbard, the dean of Columbia University's Graduate School of Business.
While legislators and economists agree that the AMT is not serving its original purpose, they acknowledge that the tax would be costly to replace. According to the Tax Policy Center, a nonpartisan tax policy group, the AMT is expected to generate, at current rates, an additional $112 billion on top of regular federal income taxes in 2010.
As Rangel, the New York Democrat, said of tax reform generally, "You can't do this without winners and losers."
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