- The Washington Times - Tuesday, October 18, 2005


Most deductions, credits and other tax breaks would be eliminated along with much of the paperwork and equations that baffle taxpayers under a drastically simplified income tax proposed yesterday by a presidential commission.

The President’s Advisory Panel for Federal Tax Reform, charged with developing ideas to make taxes fairer, simpler and more economically productive, endorsed two alternatives for inclusion in a report due Nov. 1.

Under both plans, three out of four taxpayers would fall into the lowest, 15 percent, tax bracket. Under one plan, Americans 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 people 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.

The withdrawn tax breaks would be replaced with simpler benefits, including three savings plans that supplant dozens currently available for retirement, medical expenses and education.

Senate Finance Committee Chairman Charles E. Grassley, Iowa Republican, warned the panel that some of the ideas previously had been promoted, and soundly rejected.

“Some of the things they’re recommending were hot issues in the 1990s, and they were dropped after being pushed by predecessors of mine very strongly and just didn’t get anywhere,” he said.

The White House made no commitment to stick to the panel’s recommendation when forwarding its tax-simplification proposal to Congress, a move that White House spokesman Scott McClellan said is not expected before next year.

Under both plans, Americans could continue to save for retirement by setting aside part of their untaxed salary in a work account. Taxpayers also could stash up to $10,000 each, for a total of $20,000, into a retirement savings account and a family savings account, used for health expenses, education or buying a home.

Two of the biggest tax breaks now available would be limited and redesigned to spread the benefits to more moderate- and low-income taxpayers. The home mortgage interest deduction would be converted to a credit worth 15 percent of interest paid during the year, with a cap on the size of a mortgage eligible for the benefit.

The unlimited tax breaks for health care benefits would be limited to total value of health insurance provided to members of Congress, $11,500 in premiums for family coverage and $5,000 for individuals.

The ideas immediately came under fire from Republicans and Democrats worried that taxpayers in their states would lose out under the new rules.

House Minority Whip Steny H. Hoyer, Maryland Democrat, and Rep. Rahm Emanuel, Illinois Democrat, called both proposals a “bait and switch” that would harm middle-class taxpayers.

“What the panel seems to offer with one hand, it apparently wants to take away with the other,” they said.

Sen. Charles E. Schumer, New York Democrat, said eliminating the state and local tax deduction would slap a $12 billion tax on New Yorkers.

Rep. Steve Israel, New York Democrat, and Rep. Katherine Harris, Florida Republican, said shrinking homeowners’ tax breaks will hurt families in states with expensive housing. “Reducing the interest deduction is a shortsighted attempt to balance budgets on the back of the middle class,” they said.

Panelist Charles O. Rossotti, a former Internal Revenue Service commissioner, urged taxpayers and lawmakers not to jump to the conclusion that they would be worse off under their simpler plan.

“Take a look at what your bottom line is,” he said.

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