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Tuesday, October 18, 2005

Panel to Urge Bush to Consider 2 Alternative Tax Plans - New York Times

Panel to Urge Bush to Consider 2 Alternative Tax Plans - New York TimesOctober 18, 2005
Panel to Urge Bush to Consider 2 Alternative Tax Plans
By DAVID E. ROSENBAUM

WASHINGTON, Oct. 18 - President Bush's tax advisory commission agreed today to recommend two alternative tax plans, both of which would limit or eliminate almost all tax deductions, including the ones for state and local income and property taxes.

The recommendations, due to be submitted to the president by Nov. 1, were designed so that the tax burden borne by the rich, the middle class and the poor would be roughly the same as they are now.

But the plans would amount to the most fundamental changes in the American tax system in 20 years. Some individuals and businesses could owe much more in taxes and some much less.

"We have focused on big picture ideas that would improve the tax system for a large number of Americans," said the panel's chairman, Connie Mack, a former Republican senator from Florida.

"Simplification has driven this," he said. "Also fairness."

President Bush is not committed to adopting the commission's recommendations, and many of the proposals are sure to be unpopular in Congress.

One of the most important elements of the plans is that they would replace almost all deductions with tax credits. This would mean that an expense, like the interest payments on a modest-sized mortgage, would be worth the same to each taxpayer regardless of income. Deductions are worth more to taxpayers in high brackets than they are to those in lower brackets.

The last time such sweeping changes were made in the tax law was in 1986. Enactment of that measure required the unqualified commitment of President Ronald Reagan, then at the peak of his popularity; the political mastery of his treasury secretary, James A. Baker III; the work of a bipartisan coalition in Congress that included many of the most influential senators and representatives; and two years of intensive maneuvering and horse-trading.

There is no indication now that President Bush, his staff and Congress are prepared to embrace such an effort.

The plans are quite sketchy. There is no written summary, much less legislative language. But the basics could be gleaned from a three-hour discussion this morning at the commission's last public meeting before a final recommendation is written.

For individuals, the two plans are almost identical. These are some of the main elements:

The alternative minimum tax, a steep levy faced by an increasing number of middle-income taxpayers, would be abolished.

The tax break on home mortgages would be sharply limited, especially for expensive houses.

No deduction would be allowed for state and local income and property taxes.

Employer-paid health insurance premiums above $5,000 a year for an individual and $11,500 for a family policy would be treated as income to workers and taxed accordingly.

All taxpayers could deduct charitable donations, but only to the extent they exceeded 1 percent of a taxpayer's income.

Personal exemptions and deductions and credits for children would be eliminated and replaced by a credit of $1,600 for a single person, $3,200 for a couple, $1,500 for each child and $500 for each other dependent.

The myriad savings vehicles available now like individual retirement accounts and 401(k) plans would be replaced by three streamlined savings plans and a refundable savings credit for low-income workers.

The six tax brackets in the existing law would be replaced by four, with a low bracket of 15 percent and a top rate of 33 percent. The top rate now is 35 percent.

The two plans differ on the way they would treat investment income. One would eliminate taxes on dividends entirely, lower the top capital gains rate to 8.25 percent on the sale of stock in American corporations and tax interest income at the same rate as wages and salaries.

The other plan would have a 15 percent rate on dividends, interest and capital gains. The rate now is 15 percent on dividends and capital gains, and interest payments are taxed like earned income.

The commissioners rejected an alternative plan that would have made investment income tax-free. The panel's vice chairman, John B. Breaux, a former Democratic senator from Louisiana, said such a plan was unacceptable politically because some of the wealthiest Americans, those who live off their dividends and capital gains, would owe no taxes.

One of the biggest changes would be the limits on tax breaks for homeowners. Now, all interest payments on mortgage loans smaller than $1 million are deductible.

Both plans would lower the limit to the maximum mortgage the Federal Housing Administration will insure. That level changes each year and varies depending on housing costs in each county, with a maximum loan limit now of $312,895 in communities where housing is most expensive and a national average of about $244,000.

The commission would raise to $600,000 from $500,000 the amount of profits from home sales that would be excluded from capital gains taxes.

Another big change would be the elimination of the tax deduction on state and local taxes.

Together, these two provisions would be difficult to accept for New Yorkers, where house prices are high and income and property taxes are steep.

Senator Charles E. Schumer, Democrat of New York, announced even before the panel had finished its discussion today that he would fight such proposals.

But one of the panel's members, Charles O. Rossotti, a former commissioner of internal revenue, said deductions of state and local taxes were much less valuable than they used to be because, for many taxpayers, they are eaten away by the alternative minimum tax.

The panel was instructed to present plans that would raise as much revenue as the current tax system. And in order raise enough money to abolish the alternative minimum tax, which would generate $1.2 trillion over the next 10 years, the commission had to propose limits on tax breaks.

The two plans to be submitted to the president are quite different in the way they treat businesses, though both would lower the maximum corporate tax rate to 32 percent from 35 percent.

One plan would require investments in plants and equipment by large companies to be written off under depreciation schedules and allow businesses to deduct the interest they pay on loans. This plan would eliminate many of the tax preferences that allow businesses with comparable profits to pay widely different amounts in taxes.

The other plan would allow businesses to write off the cost of plants and equipment in the year the cost is incurred, a system known as expensing, and would disallow deductions of interest.

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