(FORTUNE Magazine) – CLAIMING THAT VICTORY HAS BROUGHT him a wealth of "political capital," President Bush now pledges to spend part of the bounty on a massive overhaul of America's byzantine tax system. Bush is already championing three general goals. First, he wants a far simpler tax code than today's porous, exemption-riddled regime. Second, he favors a system that rewards savings and investment by shifting more of the burden onto spending. And third, Bush pledges to get there not by tinkering but by dramatically reshaping the way our government raises revenue. Though no one knows precisely what shape his proposal will take, three broad paths lead where he wants to go.

One option, popular at least with some of his base, is a radical new national sales tax. Backing the idea is Majority Leader Tom DeLay (R-Texas). President Bush himself has spoken favorably about an NRST, stating in August that it's an "interesting idea that ought to be explored seriously." The tax is getting strong support from red states and rural areas. A bill introduced by Georgia Congressman John Linder--it has garnered 54 co-sponsors--would raise virtually all federal revenue with a 23% levy on sales.

But despite that enthusiasm, this first path is going nowhere fast. Linder's proposal would require rates so crushing, so out of proportion with any existing sales tax, that it would prove totally unworkable. To begin with, the 23% rate is misleading, because it's calculated on the retail price plus the tax. The tax you'd pay is actually $30 on a $100 purchase. Because the NRST is highly regressive, the cost of the bill also includes hard-to-administer monthly refunds called Demogrants to virtually every taxpaying household in the U.S. Under an NRST, to achieve the goal of eliminating the tax forms that drive Americans bonkers, state and local governments would need to transform their income taxes into sales taxes. Those new sales taxes, coupled with a modest rate of evasion--none is assumed in the bill--would hike the rate to over 60%, according to William Gale, an economist at the Brookings Institution. With a tax that high, the temptation to evade it becomes overwhelming. "Many people would masquerade as businesses" to avoid the tax, says Robert Hall, an economist at the Hoover Institution. Gale reckons that evasion would be far higher than today's estimated 15%, pushing the tax rate needed to replace today's regime to well over 100%.

Those odds take other prominent Republicans down another path, towards a "flat tax." Its fans include Senators Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, and Arlen Specter (R-Pennsylvania). Flat-tax legislation would create a single rate for all income, or far fewer tax brackets. The government would impose lower rates, but collect the same amount of revenue by allowing fewer deductions. Grassley, for example, wants to keep the charitable and mortgage deductions but erase most other tax breaks. He reckons that a 22% flat rate would raise the same level of revenue as today's series of six rates, rising from 10% to 35%.

Still another proposal that's popular with prominent Republicans is a consumption tax that, unlike the NRST, really works---a levy similar to Europe's value-added tax. Congressman Jim McCrery (R-Louisiana) favors a VAT-like tax that, once again, would replace the income tax. In a VAT system, businesses, not individuals, make the actual tax payments. At each stage in the production of a loaf of bread, for example, the baker or grocer pays a tax on the markup he adds to the product, so the government collects the money in chunks. Since companies leave a paper trail, evasion is far lower than with a sales tax. It's an efficient, potent money-raiser that could replace our entire tax system.

The problem with the value-added tax is that because it is disguised, it's relatively easy for the government to keep raising the rate. "To raise the most money with the least squawk, the VAT is the best tax there is," says legendary economist Milton Friedman. "But it's a hidden tax that would be overused. That's what happened in Europe."

Faced with all this, which way is Bush leaning? As good as VATs and sales taxes look on paper, their problems outweigh their benefits. So Bush will probably choose to combine parts of the flat tax--fewer, lower rates paid for by fewer deductions--with more tax shelters for savings. That combination would achieve his goals of simplification and encouraging the savings and investment that fuel economic growth. He's already proposing two new accounts, RSAs and LSAs, that would enable Americans to save far more money tax-free.

So Bush may indeed reform the system. But given America's budgetary pressures (see "The $50 Trillion Mess"), the idea that Bush will be able to blow up the tax code, leaving all Americans with lower rates and no forms to fill out, is, sadly, a dream no amount of political capital can buy.