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Tax reform panel offers two proposals
Simplification of the federal tax code, and a consumption tax are the focus.
October 18, 2005: 7:10 PM EDT

NEW YORK (CNN/Money) The Presidential Tax Reform Panel agreed on Tuesday to recommend two plans that would reform the U.S. federal tax code, according to published reports.

The first plan is a simplified and heavily modified version of the current income tax code, while the second plan introduces a consumption tax into the system, according to reports from Reuters and DowJones Newswires.

The simplified plan the bipartisan panel discussed will be a modified version of the current, income-based federal tax code.

It would, among other things:

  • Cut the number of income tax brackets from six to four 15 percent, 25 percent, 30 percent and 33 percent.
  • Eliminate the marriage penalty.
  • Revamp capital gains taxes so that stocks and dividends would only be taxed at the individual level, not the corporate one, too.
  • Eliminate deductions for state and local taxes.
  • Limit the home mortgage deduction
  • Expand the capital gains exclusion on home sales from $500,000 to $600,000 for couples.
  • Cap the amount of tax-free money an employer could pay for a workers' health insurance plan to $11,500 for families. Anything paid above that threshold would be treated as taxable income to the worker.
  • Reduce the variety of tax-advantaged retirement and health savings plans to just three types: "save for retirement" accounts, which would replace IRAs and deferred compensation plans; "save for work" accounts, which would replace employer-provided retirement savings plans like 401(k)s; "save for family" accounts, which would replace health savings, medical savings and flex-spending accounts.

The simplified plan would also abolish the alternative minimum tax (AMT), a move estimated to cost the federal government $1.2 trillion in revenue over 10 years. The AMT was designed to prevent the wealthy from taking so many deductions that they didn't pay their fair share of taxes. But increasingly it has begun to ensnare middle-income taxpayers.

The panel's recommendations must be revenue-neutral meaning they must generate the same amount of revenue as the existing code. So what revenue the AMT elimination taketh away, the other recommendations must replenish.

On balance, though, according to the Dow Jones report, taxpayers would pay no more or no less than they do under the current system. "The bottom line, the amount of tax that is actually paid, will be distributed essentially the same way it is now," said former IRS Commissioner and panel member Charles Rossotti. "Taxpayers with very high incomes, middle and upper incomes, lower incomes will pay about the same burdens ... but with a lot less hassle."

The panel's second proposed plan would add to the system a progressive consumption tax.

It would, among other things:

  • Impose a flat tax of 15 percent for individuals on capital gains, interest and dividends
  • Reduced the number of income tax brackets from six to four 15 percent, 25 percent, 30 percent and 33 percent
  • Allow for a limited mortgage interest deduction; and
  • Eliminate the AMT

The panel's recommendations will be the first, rather than the last word on tax reform.

The panel will present its report on Nov. 1 to Treasury Secretary John Snow, who will review their recommendations and decide which ones to send to President Bush for consideration. The president will then consider which ones he wishes to propose to Congress for debate.

While President Bush said tax reform was a top priority, there is virtually no chance any more action will be taken on tax reform this year. White House spokesman Scott McClellan said in a press briefing Tuesday that the president will not put forth his recommendations to Congress before 2006, given lawmakers' full agenda. That agenda includes consideration of Harriet Miers' nomination to the Supreme Court and a host of budget issues.

For a closer look at the panel's proposal to change the mortgage deduction, click here. And see what they're proposing to change about the tax advantages of workers' health insurance plans.  Top of page

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