Bush panel proposes broad tax-law changes

Both plans would lower tax rates on individuals and businesses.

Under one plan, individuals would pay no tax on dividends paid by U.S. companies and exclude 75 percent of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15 percent.

Both proposals would abolish the alternative minimum tax, a levy originally drafted to prevent wealthy individuals from escaping taxation but increasingly reaching into the middle class. They also would eliminate federal deductions and credits for mortgage interest, state and local taxes and education, among others.

Tax reform recommendations Brief explanations of the two proposals by the President’s Advisory Panel on Federal Tax Reform: — SIMPLIFIED INCOME TAX: Like the current system, this option levies taxes on individual and business income. The panel stripped out most of the tax deductions and credits available to taxpayers and added back only those that the panel members believed would encourage certain behaviors, such as saving, charitable giving or home buying. The panel said it wanted to shorten tax forms and remove some of the mystery involved in tax calculations. — MODIFIED PROGRESSIVE CONSUMPTION TAX: To individual taxpayers, this system would appear almost identical to the simplified income tax. But, because of changes in the way businesses would be taxed, it marks a shift toward a consumption tax. Businesses could deduct their capital spending and wages from taxation, but they would lose a deduction for interest payments. This consumption tax would act indirectly, unlike a national retail sales tax. It differs from a pure consumption tax by applying a 15 percent tax on capital gains and dividends paid to individuals, a modification the panel made to prevent wealthy taxpayers from getting a much larger benefit than others.

The advisory commission would replace those withdrawn tax breaks with simpler benefits, including three savings plans that supplant more than a dozen provisions currently available for retirement, medical expenses and education.

Bush set certain limits on the panel, requiring that the new plans collect roughly as much tax money as the government collects now.

The proposals also had to retain the progressive system that taxes wealthier taxpayers at higher rates than poorer individuals and families. They were also required to recognize “the importance of homeownership and charity in American society.”

The panel rejected frequently touted ideas to impose taxes on consumption, like a retail sales tax.

Instead, the group chose to use one recommendation to push for major simplification of the current income tax system. Its second recommendation makes changes for businesses that shift the nation’s tax system toward indirect tax on consumption.

The changes allow every taxpayer to use a simpler tax form, less then half the length of the current Form 1040. Snow said that would also cutting in half the number of taxpayers who need to hire a professional tax preparer.

The tax-writing House Ways and Means and Senate Finance committees pledged to take a close look at the recommendations.

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