Tax Reform Proposal May Be Delayed Until 2007

by Mike Godfrey, Tax-News.com, Washington

06 December 2005

According to reports, the Bush administration may delay the unveiling of a broad tax reform proposal until 2007 while the Treasury continues to deliberate on the recommendations of the tax reform panel, in order to avoid having to sell a controversial policy initiative during a mid-term election year.

The tax reform panel presented its report to Treasury Secretary John Snow in November, and it was initially envisaged that he would submit his own recommendations in time for inclusion in President Bush's 2006 State of the Union address in January. However, Republicans with close ties to the White House have revealed that Mr Bush is likely only to speak generally on tax reform rather than outline specific proposals.

"I don't think there is enough time to churn out a policy," said one Republican source, according to Reuters.

Time Magazine has also reported that a tax reform proposal is unlikely to attract Democratic support during a mid-term election year.

''No one wants to put something out there that's not going to go anywhere," the magazine quoted a White House official as observing.

The tax reform effort may also be hampered by the fact that the assistant secretary for tax policy post has been vacant for several months, and one Republican source noted that there is insufficient manpower to churn out such an extensive and wide-ranging policy initiative.

After months of discussion in numerous meetings throughout the year, President Bush's Advisory Panel on Federal Tax Reform recommended two options for simplification of the US tax code in its final report, which was released earlier in the month.

The first plan, known as the Simplified Income Tax Plan proposes to:

• Reduce the number of income tax brackets to four at 15%, 25%, 30%, 33%.
• Exclude 100% of dividends of US companies paid out of domestic earnings.
• Exclude 75% of corporate capital gains from US companies (the tax rate would vary from 3.75% to 8.25%).
• Tax interest at regular income tax rates.
• Tax small businesses at individual rates (top rate lowered to 33%).
• Tax large businesses at 31.5% under a territorial system with simplified accelerated depreciation.

The second plan, known as the Growth and Investment Tax Plan, proposes:

• Three tax brackets: 15%, 25%, 30%.
• Dividends, capital gains and interest income all taxed at 15%.
• Sole proprietorships taxed at individual rates (top rate lowered to 30%).
• Other small businesses taxed at 30%.
• Large businesses taxed at 30% on a destination basis with expensing for all new investment.
• Interest paid and received will be non-deductible except for financial institutions.
  

Under both plans:

- State and local taxes will be non-deductible.

- Alternative minimum tax, which is projected to raise the taxes of more than 21 million taxpayers in 2006 and 52 million taxpayers by 2015, will be eliminated.

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