NEW YORK (CNN/Money) – Over the past year, the tax panel appointed by President Bush to propose reforms for the U.S. federal tax code has considered revolutionary changes like scrapping the income tax and replacing it with a national retail sales tax.

But judging from the panel's latest discussions, the members will not propose anything of the kind when they submit their final report to the Treasury on Nov. 1.

What is likely, according to the bipartisan panel's chairman, former Senator Connie Mack (R-Fla.), is that they will use the existing income tax system as a base in their proposals.

There's still one radical idea left on the table, however: a hybrid system that combines the income tax with a value-added tax (VAT).

A VAT is a type of sales tax, but it's not just a retail tax paid at the cash register. It's levied at every stage of manufacturing. So all businesses involved in making a product pay a VAT and then the end-user – or retail consumer – ponies up as well.

The idea is that by adding a VAT to the income tax system, it could lower personal and corporate income tax rates. It is often called an "efficient" tax because it encourages savings.

Here's how: taxpayers pay less tax on their income and have more control over how much VAT they pay, since they can choose to reduce their purchases.

That, theoretically, frees up more money for savings, which can be invested in capital, and that, in turn, can foster economic growth.

But the question is, can such a system meet all four parameters set for the panel by President Bush? He said any reform proposal must strive to make the tax code simpler, fairer and more growth-oriented. He also said all proposals must be revenue-neutral – meaning they must raise the same amount of revenue as the current system.

That's a tall combo order. At a public meeting held Oct. 11, the panel made that evident as they discussed their concerns about a hybrid system. Those concerns included:

Fairness: Sales taxes of any kind tend to hit lower income taxpayers the hardest, unless adjustments are made to lessen their burden. Panel member William Franzel, a guest scholar at the Brookings Institution and a former Congressman (R-Minn.), noted that a hybrid system likely would need to impose a tax credit for VAT paid by lower income taxpayers. And that can add further administrative costs and burdens.

What's more, the items that would be exempt from a VAT might have to be coordinated with those items typically exempt from state and local sales taxes, such as housing and food. But the more items that are exempt, the higher the VAT rate needs to be.

Simplicity: Several panel members, including former Senator John Breaux (D-La.), the panel's vice chairman, expressed strong concern that layering another tax on top of an existing one will complicate the system rather than simplify it.

Former IRS Commissioner Charles O. Rossotti said it would be better initially to simplify and make more transparent the existing system. "Then we can make a more rational choice as to how to raise added revenue as needed," he said.

He also expressed concern about the potential for fraud if VAT refunds were offered for lower income taxpayers.

The tax-and-spend temptation: Frenzel noted that a frequent complaint about a VAT is that it is a "money machine that can be raised at will" and that it will create an unwarranted enlargement of government. Even if lawmakers don't increase the rate, a VAT still can bring in more than estimated when prices or productivity rise.

Panel member Timothy Muris, a law professor and a former commissioner of the Federal Trade Commission, argued that a VAT could provide greater temptation to impose higher taxes to remedy increased fiscal pressures when Baby Boomers retire. He cited the payroll tax that workers pay to fund Social Security as an example. Unlike income tax rates, which have gone up and down, he said, the payroll tax rate has only been increased over the years.

At the end of the discussion on Oct. 11, Connie Mack, the chairman, acknowledged that consensus among the panelists on these issues would be hard to reach.

Nevertheless, the panel agreed to ask its staff to crunch some numbers to see more concretely how high rates would need to be for a hybrid VAT/income tax structure to raise as much revenue as today's system, while making allowances for lower income taxpayers.

Jeffrey Kupfer, executive director of the panel staff, said they would try to pick a VAT rate high enough so that it would be unattractive for politicians to increase it anytime soon, and then see how much that would lower income tax rates.

Even if the panel ultimately decides to quash the idea of a VAT, and just make changes to elements within the existing system, "you still can do fundamental reform," Kupfer said.

Most notably to date, the panel has indicated it wants to propose that lawmakers eliminate the alternative minimum tax (AMT) and downsize the tax breaks offered to homeowners with mortgages and to workers with employer-provided health insurance.

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