Panel recommends simplifying taxes by dropping most deductions, credits |

Panel recommends simplifying taxes by dropping most deductions, credits

WASHINGTON – Declaring the income tax system “has become a running joke,” a presidential panel on Tuesday recommended rewriting the nation’s tax laws by eliminating virtually every deduction and credit and replacing them with simpler benefits for more taxpayers.Treasury Secretary John Snow said he would study the report, issued by the President’s Advisory Panel on Federal Tax Reform, and hoped to present formal recommendations to President Bush later this year.”These are bold recommendations,” Snow said. “These are recommendations that will challenge orthodoxy in a lot of ways on tax policy.”The nine members of the commission said key recommendations would be unpopular.”Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts,” the group said in a letter to Snow.Marginal tax rates would be lower for individuals and businesses under two alternative tax systems endorsed by the panel.Both would eliminate most deductions and credits in an effort to simplify tremendously complicated calculations. The second of the two tax systems aims to reduce taxes on savings and investments made by businesses and families.In place of current tax breaks, the panel would create a few tax credits and three savings accounts that they said would encourage homeownership, charitable giving and saving while also supporting lower income workers and their families.The panel sharply criticized lawmakers’ tendency to use the tax code to promote their policy agendas, noting there had been 15,000 changes in tax laws since the last major rewrite in 1986.Snow and the panel’s members urged lawmakers and taxpayers to look at the package as a whole, not to concentrate solely on benefits lost.Very quickly, however, the panel heard criticism of their decisions to limit or scrap deductions for mortgage interest, health insurance premiums and state and local taxes.”Unfortunately, President Bush’s tax panel is a Trojan horse, using so-called simplification to cut taxes for the wealthy while increasing taxes for middle-class families,” said House Minority Leader Nancy Pelosi, D-Calif.Sen. Jim DeMint, R-S.C., said the recommendations didn’t go far enough. “We need comprehensive reform that will make America the best place in the world to invest and do business,” he said.Mark Weinberger, a former Treasury Department official who is now Americas Vice Chairman at Ernst & Young, said successful tax reform requires taxpayers to look at the benefits of any new tax system, not just the costs.”Tax reform is all about trade-offs. It’s all about winners and losers,” he said. “I think tax reform is absolutely going to happen, the question is just when.”Specifically, the panel said the mortgage interest deduction should be replaced with a credit worth 15 percent of mortgage interest paid, to spread the benefit to more homeowners of modest incomes. The panel also recommended lowering the $1 million limit on mortgages eligible for the tax break to the average regional price of housing, ranging from $227,000 to $412,000.In another major change, taxpayers could purchase health insurance using untaxed money up to about $5,000 for an individual and $11,500 for a family, a change that caps currently unlimited breaks but would create a new tax break for those who do not get health insurance through work.Both proposed tax systems would abolish the alternative minimum tax, a levy originally drafted to prevent wealthy individuals from escaping taxation but increasingly reaching into the middle class.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.The time might be right to start selling some new ideas to taxpayers, said Lindy Paull, a former chief of staff for the Joint Committee on Taxation, now co-managing partner at the Washington National Tax Services of PricewaterhouseCoopers.”The average American thinks they’re way too complicated. They really appear very unfair,” she said. “I think it in concept is an easy sell, but you know, when you get to the details, it’s a lot harder.”—On the Net:President’s Advisory Panel on Federal Tax Reform:

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