Early Look at the President's Tax Reform Panel Report

November 01, 2005

Via Tax Prof Blog, Bloomberg provides this early look at the President's Advisory Panel on Federal Tax Reform's final report to Treasury Secratary John Snow, which is due out this morning:

President George W. Bush's tax advisory panel unanimously backed two alternatives for overhauling the current system that would scrap or curb many popular deductions and tax labor more heavily than investment. The nine-member panel, wrapping up 10 months of work, said in a letter today to Treasury Secretary John Snow that the current tax code is laden with "gimmicks" and "hidden traps," such as the alternative minimum tax, which it recommends repealing. The two proposals would raise about the same amount of money as the current system, the panelists said....

The panel proposed a "simplified income tax" that reduces the number of tax rates to four from six and sets the top rate at 33%, down from 35%. The plan abolishes the alternative minimum tax and one of its triggers -- the deduction for state and local taxes. The plan restructures incentives for homeownership, health coverage and charitable giving. As an alternative, the panel recommended what it called a "Growth and Investment Tax Plan" that resembles a modified flat tax. The plan rewards savings, removes tax incentives to borrow, stimulates business investment, and simplifies tax filing for individuals.

The proposal would reorder tax rules for companies, financial markets and the economy by abolishing deductions for interest paid and allowing companies to fully expense purchases they currently must depreciate over time. Individuals would face three tax brackets for their wage income and would face a 15% tax on all forms of investment income.

The panel made some minor changes to the broad recommendations it outlined on Oct. 18, especially for housing. Interest on only about the first $227,000 of a mortgage in cheaper markets could be used to reduce taxes, compared with interest paid on mortgages of up to $1 million now. For more expensive markets, the cap would be $412,000. The panel recommended converting the current deduction to a 15% tax credit. That means people who don't currently itemize deductions could claim it, though people in higher tax brackets who get a deduction of as much as 35 percent would lose much of their benefit.

Both plans would continue to allow home sales to be tax- free and would increase the exclusion to $600,000 for a married couple from $500,000 now. Panelists discussed, though did not agree on, requiring people to live in their homes longer to get the exclusion. Homeowners must currently live in their homes an aggregate of two of the previous five years to exclude capital gains. The panel agreed to limit the amount of health insurance an employer can provide tax-free to employees to about $5,000 for an individual and $11,500 for a family; the benefit is currently unlimited.

We'll be posting analysis the Panel's report throughout the day, so stay tuned for more.

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