Tax Advisers to Bush Prepare 2 Overhaul Plans
October 19, 2005
By DAVID E. ROSENBAUM
nytimes.com
WASHINGTON, Oct. 18 - 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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