US Treasury Really Is Working On Tax Reform Proposals

by Mike Godfrey, Tax-News.com, Washington

20 April 2006

US Treasury Secretary John Snow has said that his department remains "busy" working on proposals for simplification of the US tax code, despite the fact that the Bush administration appears to have quietly shelved its tax reform commitments until 2007.

"At the Treasury Department we are quite busy working on tax reform, carefully considering the options provided by the Tax Panel," Mr Snow stated in response to a question posed in an online interactive forum known as "Ask the White House."

However, Mr Snow once again reiterated that the Bush administration is in no immediate hurry to forge ahead with tax reform.

"Reform of the code is so important and the opportunity to really improve it only comes around every twenty years or so, so we want to be sure that we get it right. So at this time we must consider all options carefully and be sure that we are creating a more simple and fair tax system for all," he explained.

With mid-term elections approaching, it is now widely believed that moves towards serious tax reform will not begin in earnest for about a year. Indeed, Senate Finance Committee chairman Charles Grassley (R - Iowa) told Tax Council members earlier this month that the Treasury will not publish its long-awaited report on tax reform until next year at least.

"From what I’ve heard, this won’t happen this year," stated Grassley.

After months of discussion in numerous meetings throughout 2005, 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 published last November.

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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