Tax Advisers to Bush Prepare 2 Overhaul Plans

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http://www.truthout.org/docs_2005/101905J.shtml

 

Tax Advisers to Bush Prepare 2 Overhaul Plans

By David E. Rosenbaum

The New York Times

 

Wednesday 19 October 2005

 

Washington - President Bush's tax advisory commission agreed on

Tuesday to recommend two alternative plans, both of which would limit

or eliminate almost all existing tax deductions, including those 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 burdens borne by the rich, the middle

class and the poor would be roughly the same as now.

 

But the plans, if enacted, would amount to the most fundamental

change in the American tax system in 20 years. Some individuals and

businesses could owe much more in taxes than they do now, and some

much less, depending on their particular circumstances. And taxpayers

in some parts of the country would fare better than those elsewhere.

 

" We have focused on big-picture ideas that would improve the tax

system for a large number of Americans, " said the panel's chairman,

former Senator Connie Mack, Republican of Florida.

 

" Simplification has driven this, " Mr. Mack said. " Also fairness. "

 

Mr. Bush is not committed to adopting the commission's

recommendations, and many are sure to be unpopular in Congress.

 

The two plans are similar in their treatment of individuals and

families. The main differences involve business taxes.

 

One of the chief aspects of the plans is that they would replace

personal exemptions and almost all deductions with tax credits. That

means a tax break like the one for interest payments on a modest-size

mortgage would be worth the same to each taxpayer regardless of

income. Deductions and exemptions, by contrast, are worth more to

taxpayers in high brackets than to those in lower brackets.

 

What tax breaks there are, said Mr. Mack, " should be shared by all

taxpayers. "

 

The last time such sweeping changes were made in 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 Mr. Bush, his staff and Congress

are prepared to embrace such an effort.

 

One of the biggest changes would be to limit tax breaks for

homeowners. At present, all interest payments on mortgage loans

smaller than $1 million are deductible. For the new mortgage interest

credit, however, both plans would lower the mortgage limit to the

maximum that the Federal Housing Administration will insure. That

level changes each year and varies depending on housing costs in each

county, with a current maximum loan limit of $312,895, in communities

where housing is most expensive, and a national average of about $244,000.

 

Deductions of the interest payments on home-equity loans and on

mortgages for second homes would be disallowed.

 

These provisions would be phased in over five years to allow

taxpayers to adjust to the changes.

 

The commission would also raise to $600,000 from $500,000 the

amount of profits from home sales that could be excluded from capital

gains.

 

Another big change would be the elimination of the deduction for

state and local taxes. That proposal, combined with the one on

mortgages, would make acceptance hard in New York, where house and

apartment prices are high and income and property taxes are steep.

 

The panel had been instructed to present plans that would raise as

much revenue as the current tax system. It decided early on to

recommend abolishing the alternative minimum tax, an unpopular levy

that would be increasingly faced by middle-income taxpayers. To offset

the $1.2 trillion that this tax is scheduled to generate over the next

10 years, the commission had to propose limits on popular tax breaks.

 

For individuals and families, the two plans are almost identical.

In addition to abolishing the alternative minimum tax, limiting the

tax breaks for homeowners and eliminating the deduction for state and

local taxes, these are some of the main elements:

 

* 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 that they exceeded 1 percent of income.

 

* The myriad tax-advantaged savings vehicles now available, like

individual retirement accounts, 401(k) plans and tax-free savings for

education and health care, would be replaced by a streamlined system

of three 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 in

one plan and 35 percent in the other. The top rate now is 35 percent.

 

The two plans differ in the way they would treat investment

income. One would eliminate taxes on dividends paid by American

companies and lower the top capital gains rate to 8.25 percent on the

sale of stock in such companies, while continuing to tax interest

income at the same rate as wages.

 

The other plan calls for a 15 percent rate on dividends, interest

and capital gains. At present, the rate on dividends and capital gains

is 15 percent.

 

The plans 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 large companies' investments in plants and

equipment 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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