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10-12-2005, 11:17 PM
http://www.nytimes.com/2005/10/11/politics/11cnd-tax.html?ei=5088&en=927e1df80ddab3d3&ex=1286683200&adxnnl=1&partner=rssnyt&emc=rss&adxnnlx=1129176924-Vxhe5fmvshHSIpaQ8DW9ZQ
WASHINGTON, Oct. 11 - President Bush's tax advisory commission indicated today that it would not propose replacing the income tax with a national sales tax or a value-added tax but would recommend modifications in the popular tax deductions for mortgage interest and employer-provided health insurance.
The commission, scheduled to make its recommendations to the president by Nov. 1 on how to change the tax system, did not take votes and did not address ticklish details, but its consensus on many important issues was clear.
"We're getting focused on the income tax as a base," said the panel's chairman, Connie Mack, a former Republican senator from Florida.
Many prominent conservatives have argued over the years that the income tax is a drag on the economy and should be scrapped in favor of what is called a consumption tax - a tax based not on what people earn but on what they spend.
But the commission members concluded that consumption taxes like the value-added tax used in European countries had more drawbacks than advantages.
Various proposals for a flat tax - an income tax with everyone paying the same rate - are still under consideration, Jeffrey F. Kupfer, the commission's executive director, said. They are to be discussed at a meeting next week.
At its last meeting in July, the commission agreed to recommend abolishing the alternative minimum tax for individual, a step that would cost the federal government $1.2 trillion in lost revenue over 10 years.
With a mandate to develop an overall proposal for changing the tax system that is revenue neutral - meaning it neither raises nor lowers total tax receipts - the commission must find enough revenue to offset the amount now generated by the alternative minimum tax.
That is mainly what led to an examination of ways to modify the deductions for mortgage interest and health insurance, two of the largest tax breaks now available to individuals. Together, these two deductions will cost the Treasury about $250 billion this year, with the benefits going disproportionately to the most affluent taxpayers.
The commission members decided that another popular deduction, for charitable contributions, should be expanded rather than cut back. They are looking at how to give the tax break to taxpayers who do not itemize deductions.
President Bush is not committed to adopting the commission's recommendations, and the prospects in Congress of limiting the mortgage and health insurance tax breaks, sure to be politically unpopular, are problematic.
The panel's vice chairman, John B. Breaux, a former Democratic senator from Louisiana, acknowledged the political difficulty but said, "We've got to make bold recommendations without regard to politics."
Mr. Bush appointed the commission in January, largely so that Congress would concentrate first on Social Security. The panel was originally supposed to report in July, but the deadline was extended twice, first to Sept. 30 and then to Nov. 1.
Taxpayers can now deduct all the interest on mortgage loans up to $1 million. One proposal discussed today would cap the deduction at the maximum mortgage the Federal Housing Administration will insure. That level changes each year and varies depending on housing costs in each county, with a maximum loan limit now of $312,895 in communities where housing is most expensive and a national average of $244,000, according to a housing administration spokesman.
Another proposal under consideration was to change the interest deduction to a credit, meaning that taxpayers with the same size mortgage payments would get the same tax break regardless of what tax bracket they were in.
A third idea was to limit the deduction to 15 percent or 25 percent of a taxpayer's mortgage interest. The wealthiest taxpayers can now deduct 35 percent.
The generous mortgage-interest deduction in the law now helps rich people the most, leads to larger houses and encourages borrowing, said James M. Poterba, a commission member who is an economist at the Massachusetts Institute of Technology.
The panel members said they had not calculated how much revenue any of these proposals would generate. But the Congressional Budget Office reported this year that a $500,000 ceiling on the mortgage principal for which interest can be deducted would raise $48 billion over 10 years.
The panel members agreed that any of these changes would have to be phased in gradually to reduce the financial disruption for homeowners.
In the case of employer-paid health insurance, the main proposal the panel discussed would limit tax-free premium payments to the average cost of the premium the government pays for federal workers. That is now about $11,000 a year for family coverage.
Under the current law, employers can deduct every penny they pay for health insurance for their workers, and the workers are not taxed on this benefit. The panel did not agree on whether the employers or employees would be taxed if a ceiling were imposed, but as a practical matter, there would probably be no difference.
The proposal the panel discussed would allow taxpayers whose employers did not provide health insurance to deduct the amount of the premiums they paid for themselves.
The main proponent of the health insurance proposal, Timothy J. Muris, a former chairman of the Federal Trade Commission who is now a law professor at George Mason University, said limitless tax-free health insurance premiums encouraged workers to demand and companies to offer overly generous insurance and resulted in increased health costs.
Mr. Muris said he did not know how much revenue his plan would raise. The Congressional Budget Office calculated this year that a limit of $3,720 in tax-exempt premiums for an individual and $8,640 for a family policy would raise $706 billion over 10 years.
Mr. Mack and Mr. Breaux said the mortgage interest and health insurance proposals they were considering would not raise enough to offset fully the cost of abolishing the alternative minimum tax. This left open the possibility that they would end up recommending a limit on the deduction of state and local income taxes, a proposal that would cause a political uproar.
Conservatives have long hoped to get rid of the progressive income tax. When the commission began work, there were three main possibilities: a value-added tax, a national sales tax and a flat income tax.
After discussing a value-added tax, assessed on each stage of production and eventually paid by consumers, the panel members concluded that this would be what Mr. Mack called a "money machine," meaning that politicians could raise it at will without political pain. The commission members also agreed that a value-added tax would be a disproportionate burden on middle-income taxpayers and would complicate the tax system.
Mr. Mack asked the commission staff to draft a proposal for a value-added tax, but that seemed to be a formality. "I think it's going to be very difficult to get a consensus."
As for a national sales tax, the idea was dropped after a commission member, Edward P. Lazear, a labor economist at the Hoover Institution and Stanford University, reported that the sales tax would have to be as high as 87 percent on most goods and services if items like medicine, education, food and clothing were not taxed.
A commission discussion of a flat tax at a meeting in July indicated that the panel would have difficulty reaching a consensus on the details.
WASHINGTON, Oct. 11 - President Bush's tax advisory commission indicated today that it would not propose replacing the income tax with a national sales tax or a value-added tax but would recommend modifications in the popular tax deductions for mortgage interest and employer-provided health insurance.
The commission, scheduled to make its recommendations to the president by Nov. 1 on how to change the tax system, did not take votes and did not address ticklish details, but its consensus on many important issues was clear.
"We're getting focused on the income tax as a base," said the panel's chairman, Connie Mack, a former Republican senator from Florida.
Many prominent conservatives have argued over the years that the income tax is a drag on the economy and should be scrapped in favor of what is called a consumption tax - a tax based not on what people earn but on what they spend.
But the commission members concluded that consumption taxes like the value-added tax used in European countries had more drawbacks than advantages.
Various proposals for a flat tax - an income tax with everyone paying the same rate - are still under consideration, Jeffrey F. Kupfer, the commission's executive director, said. They are to be discussed at a meeting next week.
At its last meeting in July, the commission agreed to recommend abolishing the alternative minimum tax for individual, a step that would cost the federal government $1.2 trillion in lost revenue over 10 years.
With a mandate to develop an overall proposal for changing the tax system that is revenue neutral - meaning it neither raises nor lowers total tax receipts - the commission must find enough revenue to offset the amount now generated by the alternative minimum tax.
That is mainly what led to an examination of ways to modify the deductions for mortgage interest and health insurance, two of the largest tax breaks now available to individuals. Together, these two deductions will cost the Treasury about $250 billion this year, with the benefits going disproportionately to the most affluent taxpayers.
The commission members decided that another popular deduction, for charitable contributions, should be expanded rather than cut back. They are looking at how to give the tax break to taxpayers who do not itemize deductions.
President Bush is not committed to adopting the commission's recommendations, and the prospects in Congress of limiting the mortgage and health insurance tax breaks, sure to be politically unpopular, are problematic.
The panel's vice chairman, John B. Breaux, a former Democratic senator from Louisiana, acknowledged the political difficulty but said, "We've got to make bold recommendations without regard to politics."
Mr. Bush appointed the commission in January, largely so that Congress would concentrate first on Social Security. The panel was originally supposed to report in July, but the deadline was extended twice, first to Sept. 30 and then to Nov. 1.
Taxpayers can now deduct all the interest on mortgage loans up to $1 million. One proposal discussed today would cap the deduction at the maximum mortgage the Federal Housing Administration will insure. That level changes each year and varies depending on housing costs in each county, with a maximum loan limit now of $312,895 in communities where housing is most expensive and a national average of $244,000, according to a housing administration spokesman.
Another proposal under consideration was to change the interest deduction to a credit, meaning that taxpayers with the same size mortgage payments would get the same tax break regardless of what tax bracket they were in.
A third idea was to limit the deduction to 15 percent or 25 percent of a taxpayer's mortgage interest. The wealthiest taxpayers can now deduct 35 percent.
The generous mortgage-interest deduction in the law now helps rich people the most, leads to larger houses and encourages borrowing, said James M. Poterba, a commission member who is an economist at the Massachusetts Institute of Technology.
The panel members said they had not calculated how much revenue any of these proposals would generate. But the Congressional Budget Office reported this year that a $500,000 ceiling on the mortgage principal for which interest can be deducted would raise $48 billion over 10 years.
The panel members agreed that any of these changes would have to be phased in gradually to reduce the financial disruption for homeowners.
In the case of employer-paid health insurance, the main proposal the panel discussed would limit tax-free premium payments to the average cost of the premium the government pays for federal workers. That is now about $11,000 a year for family coverage.
Under the current law, employers can deduct every penny they pay for health insurance for their workers, and the workers are not taxed on this benefit. The panel did not agree on whether the employers or employees would be taxed if a ceiling were imposed, but as a practical matter, there would probably be no difference.
The proposal the panel discussed would allow taxpayers whose employers did not provide health insurance to deduct the amount of the premiums they paid for themselves.
The main proponent of the health insurance proposal, Timothy J. Muris, a former chairman of the Federal Trade Commission who is now a law professor at George Mason University, said limitless tax-free health insurance premiums encouraged workers to demand and companies to offer overly generous insurance and resulted in increased health costs.
Mr. Muris said he did not know how much revenue his plan would raise. The Congressional Budget Office calculated this year that a limit of $3,720 in tax-exempt premiums for an individual and $8,640 for a family policy would raise $706 billion over 10 years.
Mr. Mack and Mr. Breaux said the mortgage interest and health insurance proposals they were considering would not raise enough to offset fully the cost of abolishing the alternative minimum tax. This left open the possibility that they would end up recommending a limit on the deduction of state and local income taxes, a proposal that would cause a political uproar.
Conservatives have long hoped to get rid of the progressive income tax. When the commission began work, there were three main possibilities: a value-added tax, a national sales tax and a flat income tax.
After discussing a value-added tax, assessed on each stage of production and eventually paid by consumers, the panel members concluded that this would be what Mr. Mack called a "money machine," meaning that politicians could raise it at will without political pain. The commission members also agreed that a value-added tax would be a disproportionate burden on middle-income taxpayers and would complicate the tax system.
Mr. Mack asked the commission staff to draft a proposal for a value-added tax, but that seemed to be a formality. "I think it's going to be very difficult to get a consensus."
As for a national sales tax, the idea was dropped after a commission member, Edward P. Lazear, a labor economist at the Hoover Institution and Stanford University, reported that the sales tax would have to be as high as 87 percent on most goods and services if items like medicine, education, food and clothing were not taxed.
A commission discussion of a flat tax at a meeting in July indicated that the panel would have difficulty reaching a consensus on the details.