One option would streamline the existing U.S. tax code, cutting the top income tax rate to 33%, while the other would replace the existing tax code with a modified consumption tax.
"I think we have met the requirements of the president when he established this committee to simplify the tax code," John Breaux, vice chairman of the Advisory Panel on Federal Tax Reform, told reporters.
Breaux and panel chairman Connie Mack spoke after the panel concluded its 12th public meeting; the panel is due to issue its final report to the Treasury Secretary Nov. 1. The Treasury Secretary, in turn, will make final recommendations to President George W. Bush.
White House spokesman Scott McClellan said he expects the Treasury's tax reform recommendations "will be based in large part on recommendations" made by the tax panel.
Bush won't push for tax reform in Congress this year, as lawmakers are moving to wrap up spending bills and to consider the nomination of Harriet Miers to the U.S. Supreme Court, McClellan said. While he didn't set a timeline for action, McClellan left little doubt about the issue's importance for Bush.
The panel's recommendations, however, come at the very early stage of the tax debate, and any ultimate tax code rewrite could differ significantly from them. The plan is expected to draw opposition from a variety of interest groups whose tax benefits would be curtailed, such as the mortgage-finance industry and life insurers.
It would eliminate the corporate and individual alternative minimum tax, as well as deductions for state and local taxation. It also would limit the home mortgage deduction and revamp tax-preferred savings accounts, such as 401(k) plans. And it would cap the current tax benefits for employer-provided health care.
The plan was presented by former Internal Revenue Service Commissioner Charles Rossotti and University of Southern California professor Elizabeth Garrett.
While billed as simplification, their presentation took nearly an hour to complete, touching on everything from international taxation to treatment of small businesses.
"The bottom line, the amount of tax that is actually paid, will be distributed essentially the same way it is now," Rossotti said. "Taxpayers with very high incomes, middle and upper incomes, lower incomes will pay about the same burdens ... but with a lot less hassle."
Rossotti displayed a one-page tax form, which he said is all that many individuals would need under the new system. People with children or other dependents would fill out a second form to qualify for a new family tax credit.
The plan would cut the existing six marginal income tax brackets to four: 15%, 25%, 30% and 33%. That would bring the top rate down from the current maximum 35%. The plan would eliminate the "tax marriage penalty," or the additional tax certain two-earner couples pay when they're married.
The plan would revamp capital gains taxes. It would eliminate the double taxation on corporate stock and dividends, taxing these only at the individual level, not the corporate level.
Capital gains from sale of corporate stock would be subjected to a 75% exclusion of individual tax rates, which effectively cuts the top capital gains rate to 8.25% for stock held longer than one year.
The plan also seeks to revamp the myriad of tax-preferred savings accounts into three basic accounts. New "save for work" accounts would replace employer-provided savings plans such as 401(k) plans. All workers would be automatically enrolled into these plans.
New "save for retirement" accounts would replace all current individual retirement accounts, Roth IRAs, deferred compensation plans and tax-free buildup of life insurance and annuities. These would be structured like Roth IRA accounts, with a maximum $10,000 contribution a year. Taxpayers could only withdraw from it on retirement after the age of 58 and on death or disability.
New "save for family" accounts would replace health savings, medical savings and flexible spending accounts. These would have a $10,000 contribution limit with withdrawals limited for education, health expenses, purchase of a new home or retirement. Individuals could also withdraw $1,000 a year without penalty.
On health insurance, the plan would cap the individual exclusion on employer-provided health insurance at $11,500 for families, meaning individuals will pay taxes on health benefits above that threshold.
Later, the panel agreed to propose a heavily modified consumption tax, a "progressive consumption tax," that would completely replace the existing income tax system.
The plan would integrate U.S. individual and corporate tax systems, while eliminating the current deduction on interest and allowing full expensing of business investment - two major changes in corporate taxation.
For individuals, this proposal would have four tax brackets - 15%, 25%, 30% and 35%. This is designed to retain the same distribution of the tax burden among wealthy and poor as the existing system.
It would establish a 15% tax rate on capital gains and other investments. And it would cap the individual exclusion on employer-provided health insurance at $11,500 for families, meaning individuals will pay taxes on health benefits above that threshold.
Garrett expressed reservations about the plan. She said she preferred the simplified income tax, but she probably could endorse a final report with the progressive income tax after reviewing its distribution among various taxpayers.
Two top House Democrats said the tax panel's recommendations "could amount to little more than a bait-and-switch for millions of hard-working American families."
House Democratic Whip Steny Hoyer, D-Md., and Rep. Rahm Emanuel, D-Ill., said in statement that while taxpayers would benefit from the elimination of the alternative minimum tax, they would be hurt by new caps on the mortgage interest deduction, the health insurance exclusion and elimination of the state and local tax deduction.
One conservative analyst, William Beach of the Heritage Foundation, predicted Bush will use tax reform to help unify a fractured Republican party.
"Tax reform is one of those great unifying things on the right," Beach said. He applauded the panel for moving towards simplification and reduction in the number of tax credits and for rejecting a value-added tax. "If they continue in that direction in the next few weeks, I think we should all say it didn't turn out as badly as it could," he said.
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