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Tax Panel Urges Huge Overhaul

Declaring the income tax system "has become a running joke," a presidential panel recommended rewriting the United States' tax laws by eliminating virtually every deduction and credit and replacing them with simpler benefits for more taxpayers.

Treasury Secretary John Snow called the proposals "bold recommendations" but the White House said it was not yet ready to embrace any of it, reports CBS News correspondent Mark Knoller.

"The president is going to make the decisions in due course but that's after the treasury secretary sends him recommendations," McClellan said.

Under the panel's plan, most deductions, credits and other tax breaks would be eliminated along with much of the paperwork and equations that baffle taxpayers under a drastically simplified income tax.

Many, including the nine members of the presidential commission, have said key recommendations will be unpopular.

"The effort to reform the tax code is noble in its purpose, but it requires political willpower," the group said Tuesday in a letter to Snow. "Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts."

Members of the panel urged taxpayers and lawmakers to look at the whole plan, not just individual components.

Asked whether the administration could build support for a tax plan that contained some controversial ideas, Snow said, "I happen to believe — it may be naive, but I don't think so — that good ideas ultimately prevail."

The President's Advisory Panel on Federal Tax Reform spent most of the year studying tax designs, including consumption taxes like a national retail sales tax. President Bush tasked the group with finding simpler and more economically productive ideas for taxation.

The commission wrapped up its work last month, and its ideas immediately attracted criticism — some from those who wanted to see more change and some from those who felt the changes went too far.

Drawing particular criticism, the panel determined that tax breaks for homeownership be changed to spread their benefits to more middle-income families.

The deduction is a tax break on mortgage interest, which homeowners have been using to cut their taxes ever since the income tax was enacted nearly a century ago, reports CBS News correspondent Bob Orr.

It's helped make the American dream more affordable, and has been so off-limits to reformers it's been called the "third rail of tax politics," Orr says.

The panel would convert the home mortgage interest deduction into a credit equal to 15 percent of mortgage interest paid. The $1 million limit on mortgages eligible for the tax break would shrink to the average regional price of housing, ranging from $227,000 to $412,000.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, said that idea is bound to be politically unpopular. "But it's important to have a comprehensive starting point that will get everyone talking and thinking," he said.

In another major change, taxpayers could purchase health insurance using untaxed money up to the amount of the average premium, about $5,000 for an individual and $11,500 for a family, a change that caps currently unlimited breaks but would create a new tax break for those who do not get health insurance through work.

Both plans would tax rates on individuals and businesses.

Under one plan, individuals would pay no tax on dividends paid by U.S. companies and exclude 75 percent of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15 percent.

Both proposals would abolish the alternative minimum tax, a levy originally drafted to prevent wealthy individuals from escaping taxation but increasingly reaching into the middle class. They also would eliminate federal deductions and credits for mortgage interest, state and local taxes and education, among others.

The advisory commission would replace those withdrawn tax breaks with simpler benefits, including three savings plans that supplant more than a dozen provisions currently available for retirement, medical expenses and education.

President Bush set certain limits on the panel, requiring that the new plans collect roughly as much tax money as the government collects now.

The proposals also had to retain the progressive system that taxes wealthier taxpayers at higher rates than poorer individuals and families. They were also required to recognize "the importance of homeownership and charity in American society."

The panel rejected frequently touted ideas to impose taxes on consumption, like a retail sales tax.

Instead, the group chose to use one recommendation to push for major simplification of the current income tax system. Its second recommendation makes changes for businesses that shift the nation's tax system toward indirect tax on consumption.

The changes allow every taxpayer to use a simpler tax form, less then half the length of the current Form 1040. Snow said that would also cutting in half the number of taxpayers who need to hire a professional tax preparer.

The tax-writing House Ways and Means and Senate Finance committees pledged to take a close look at the recommendations.

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