(FORTUNE Magazine) – Treasury Secretary Paul O'Neill has a knack for colorful, sometimes hyperbolic phrasemaking. But when he called the tax code an "abomination" recently, he wasn't mouthing off. The Treasury Department, with help from senior White House aides, is conducting a top-to-bottom review of federal tax laws that will produce sweeping reform proposals. President Bush will review them sometime after the November elections.

There's no way to know whether the study will lead to major changes in law. Tax reform is an academic dream and a political nightmare. But the Administration is serious. All 110 professionals in Treasury's Office of Tax Policy have been, or will be, involved in the effort. O'Neill, a longtime reform enthusiast, will soon get weekly updates and has set year-end as the target for final options. The White House is participating too: Larry Lindsey, the President's top economic counselor, and Glenn Hubbard, chairman of the Council of Economic Advisors, are offering ideas. "The folks at Treasury and some of us from the White House are kibitzing, working on different options," Lindsey says. "We are at the homework stage, and we will be presenting the President options."

Pam Olson, Acting Assistant Secretary for Tax Policy, says, "Nothing is off-limits"--including an entirely new revenue-collecting system that would tax consumption rather than income. Both corporate and individual taxes are also under the microscope. Olson describes three basic options for reform: "No. 1, radical simplification of the income tax; No. 2, either a value-added tax or an income tax with consumption-tax underpinnings; or No. 3, a system with both a consumption and an income tax in it."

Bush is "excited about complete tax reform," says a former Administration official. But he is proceeding with caution because he knows it would spark battles between industries that would benefit and those that would be hurt. Changes to the personal income taxes would be even more tumultuous. Democrats, for example, would be thrilled if Bush backed a consumption tax, which falls more heavily on the poor. Says Democratic pollster Mark Mellman: "If a Republican Administration created a new form of taxation, it would usher in decades of Democratic dominance."

The prospect for tax reform "depends a little bit on what the market will bear," Lindsey admits, "and we'll have a better sense of market research after November." In other words, if Democrats do well in the congressional elections, the tax debate will probably be confined to simplification proposals sure to be championed by Treasury, but the better the Republicans do, the better the odds that debate will expand to include broad-scale reform.