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Tax panel would slash deductions, cut rates

November 1, 2005

By Mark Felsenthal

WASHINGTON (Reuters) – A bipartisan expert panel appointed
by U.S. President George W. Bush recommended on Tuesday voiding
most tax deductions and lowering tax rates to make the U.S. tax
system simpler and more efficient.

“While it is relatively straightforward to point out flaws
in a tax system and to express a desire for change, it is much
more challenging to settle on a specific solution. There are
difficult trade-offs,” panel members said in a letter to
Treasury Secretary John Snow.

Snow said the panel’s proposals will serve as the
groundwork for an administration proposal.

“Now it’s up to us to go to work on it,” he said at a
handover event at the Treasury Department. Snow said on Monday
he expects to complete his review by the end of the year.

White House spokesman Scott McClellan, told reporters the
president would eventually make his own recommendations to
overhaul the tax system.

“The president is going to be outlining more about how we
can move forward to reform the tax code and make it simpler and
fairer. It’s an important part of making sure that we continue
to build upon the strong economic growth that we’ve seen,” he
told reporters.

The advisory group’s plans to cut deductions for mortgage
interest, state and local taxes, and health care costs have
already drawn criticism from lawmakers of both political
parties and trade associations.

The National Association of Realtors said in a statement
the panel’s recommendations “would drive down real estate
values, have a devastating effect on the nation’s housing
economy and negatively impact the nation’s economy.”

“TOUGH RECOMMENDATIONS”

Panel members acknowledged their recommendations were
likely to be politically controversial.

“None of us on the commission are running again,” former
Louisiana Democratic Sen. John Breaux said in an interview on
CNBC Television.

“The panel can make some tough recommendations, and then
the process begins,” he said.

The advisory group, composed of two former members of
Congress, former government officials, academics, and an
investment company executive, recommended the Bush
administration follow one of two plans.

One — the “Growth and Investment” plan — taxes income
from dividends, capital gains and interest at a flat 15 percent
rate and businesses that are not sole proprietorships at a flat
30 percent. That plan would also reduce tax brackets to three
from the current six, with a top rate for individuals at 30
percent.

The current top individual tax rate is 35 percent.

The other, the “Simplified Income Tax” plan, would have
four tax brackets with a top rate of 33 percent. It would allow
exclusions for dividends and capital gains from U.S. firms but
tax interest at regular tax rates. Small businesses would be
taxed at regular rates under that approach.

MORTGAGE CREDIT

Both plans would replace the current mortgage interest rate
deduction, which taxpayers can claim on mortgage debt up to
$1.1 million. Instead, the panel proposes a home credit equal
to 15 percent of mortgage interest paid.

A credit is a dollar-for-dollar reduction in tax, while a
deduction is an amount that reduces the income subject to tax.

The panel would put the upper threshold of mortgages that
qualify for the credit at the average regional price of housing
– expected to range between $227,000 and $412,000, the panel
said.

“Today, less than 30 percent of American taxpayers take
advantage of the mortgage interest deduction. Under our
proposal, everyone who has a mortgage will get a benefit,”
panel chairman former Florida Republican Sen. Connie Mack said
in an interview on Bloomberg Television.

Both plans would would eliminate the minimum alternative
tax, a provision originally intended to insure that affluent
taxpayers with many deductions would pay some taxes, but which
now affects more middle-income taxpayers.

The panel also proposes eliminating deductions for payments
of state and local income taxes.

In addition, both plans would cap at $11,500 the amount a
family can shelter from taxes to pay for health insurance.

Bush is likely to urge Congress in his annual State of the
Union address early next year to tackle tax overhaul, Breaux
said.




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