US Tax Panel Recommends Two Plans In Final Report

by Mike Godfrey, Tax-News.com, Washington

03 November 2005

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

The two plans differ on the taxation of businesses and capital income. Although they use different approaches, the nine member panel of academic, legal and tax experts chaired by former Republican Senator for Florida Connie Mack said that the plans share a common goal of providing simple and straightforward ways for Americans to save free of tax while lowering the tax burden on productivity-enhancing investment by businesses.

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 U.S. 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.

- A new Family Credit will be available to all taxpayers, with a $3,300 credit for married couples, a $2,800 credit for unmarried taxpayers with children, a $1,650 credit for singles, and a $1,150 credit for dependent taxpayers. An additional $1,500 credit would be available for each child and $500 credit for each other dependent.

- Earned income tax credit will be replaced with Work Credit (and coordinated with the Family Credit); maximum credit for working family with one child: $3,570; with two or more children, $5,800

- The marriage penalty will be reduced. All tax brackets, Family Credits, and taxation of Social Security benefits for couples are double those of individuals.

- Home Credit equal to 15% of mortgage interest paid will be made available to all taxpayers; mortgage limited to average regional price of housing (limits ranging from about $227,000 to $412,000).

- A charitable giving deduction will be available to all taxpayers (who give more than 1% of income) with rules to address valuation abuses.

- All taxpayers may purchase health insurance with pre-tax dollars, up to the amount of the average premium (estimated to be $5,000 for an individual and $11,500 for a family).

- Retirement savings plans to be replaced with Save for Retirement Accounts with a $10,000 annual limit, which will be available to all taxpayers.

- Education savings accounts to be replaced with Save for Family Accounts, also with a $10,000 annual limit which would cover education, medical, new home costs, and retirement saving needs. These would be available to all taxpayers, with refundable Saver’s Credit available to low-income taxpayers.

- Social Security benefits to be replaced with a simple deduction. Married taxpayers with less than $44,000 in income ($22,000 if single) to pay no tax on Social Security benefits.

Both proposals would allow every taxpayer to use a simple tax form, less than half the length of the current Form 1040.

The Panel also developed and considered a progressive consumption tax plan that would be administered using the infrastructure of the current tax system, but was unable to reach a consensus to include it as a recommendation. In addition, The Panel also discarded ideas for a value-added tax and a national retail sales tax.

Treasury Secretary John Snow is now set to deliberate over the panel's proposals before making recommendations to President Bush as to which parts of the report, if any, to adopt.

"The recommendations that they (the tax panel) are presenting today will begin the dialogue that will help shape the future of tax policy," Snow stated on Tuesday.

"Their advice is the starting point, and I look forward to reading their recommendations and considering them carefully before I make a recommendation to the President based on the excellent work carried out by this Panel," he added.

Recommended