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Thursday, November 18, 2004 - Page updated at 12:00 AM

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Bush signals go-ahead for tax code's overhaul

The Washington Post

WASHINGTON — The Bush administration is eyeing an overhaul of the tax code that would drastically cut, if not eliminate, taxes on savings and investment, but it is unlikely to try to replace the existing tax code with a single flat income-tax rate or a national sales tax, according to several sources familiar with ongoing tax deliberations.

During his re-election campaign, President Bush piqued interest among conservatives and liberals alike when he said replacing the income tax with a national sales tax was "an interesting idea." He signaled after the election that tax policy would be a centerpiece of his domestic agenda, reiterating his pledge to name a bipartisan panel to draft a fundamental tax-reform proposal. That sent conservatives scurrying into either the flat-tax or sales-tax camp to muster political momentum.

But before the tax panel is even named, administration officials have begun dialing back expectations that they will move to scrap the current graduated income tax for another system.

Instead, the administration plans to push major amendments that would shield interest, dividends and capitals gains from taxation, expand tax breaks for business investment and take other steps intended to simplify the system and encourage economic growth, according to several people who are advising the White House or are familiar with the deliberations.

The changes are meant to be revenue-neutral. To pay for them, the administration is considering eliminating the deduction of state and local taxes on federal income-tax returns and scrapping the business tax deduction for employer-provided health insurance, the advisers said.

As the tax discussion takes shape, "we're not talking about a replacement system," said a former White House aide familiar with the emerging policy.

White House aides warn that no decisions have been made. "The president believes the tax code should be simpler, fairer and more conducive to economic growth, and he looks forward to appointing an advisory panel to review options for reforming the tax code," White House spokeswoman Clare Buchan said.

She said she expects an executive order laying out the panel's mission and naming its members by the end of the year.

The contours of a tax plan already are taking shape, though: lower individual and corporate tax rates and steps to broaden the base of taxation and promote growth by cutting taxes on investment.

"From my experience, I know that he believes strongly in broadening the (income-tax) base, lowering the rates and taking the tax code out of business decisions. That's where he would start; those key fundamental philosophies will lead his decisions," said Mark Weinberger, a former assistant Treasury secretary for tax policy, now a vice chairman of Ernst & Young.

Pamela Olson, a former Bush Treasury official in close contact with administration tax planners, said the president will pursue a tax system where all income — whether from wages, dividends, capital gains or interest — is taxed once. That would mean eliminating taxes on dividends and capital gains paid out of fully taxed corporate profits. Most investment gains currently are taxed at 15 percent.

The administration also will push hard for large savings accounts that could shelter thousands of dollars of deposits each year from taxation on investment gains, according to White House economic advisers who have been involved with the planning. And any tax reform, according to Treasury Department officials, likely would eliminate the alternative minimum tax, a parallel income tax designed to ensure that the rich pay income taxes but one that increasingly ensnares the middle class.

To pay for those large tax cuts, the administration is looking at eliminating both the deduction for state and local taxes, and the business-tax deduction for employer-sponsored health insurance. That would raise nearly $926 billion over five years, according to White House and congressional documents.

Eliminating the state and local tax deduction, for example, would allow the administration to scuttle the alternative minimum tax and raise an extra $400 billion over 10 years, said Leonard Burman, a tax-policy expert at the Urban Institute. That would be twice what the White House needs to fund the planned tax-free savings accounts, expanded retirement savings accounts and tax-free health savings accounts.

The tax panel will be given roughly six months to make recommendations, according to administration officials. Treasury Secretary John Snow then would come up with his own plan before the end of next year. That would give Bush all of 2006 to press Congress to enact the reforms, making the whole effort a two-year process.

In the meantime, lobbyists are running into skepticism on the part of corporations that might be touched by the changes. The corporate world is taking a wait-and-see position for the most part before organizing either for or against the effort.

Even allies have their doubts.

"The White House is dreaming if they think they can do all this," said Bruce Bartlett, a conservative economist with the National Center for Policy Analysis.

Copyright © 2004 The Seattle Times Company

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