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Commission Begins Review of the Tax Code

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Times Staff Writer

A presidential commission on Wednesday launched what it promised would be a top-to-bottom review of the U.S. tax code, but acknowledged that it might be wiser to modify the existing income tax than to replace it.

Members of the President’s Advisory Panel on Federal Tax Reform said all options were on the table, including proposals to replace personal and corporate income taxes with variations on a national sales tax.

“The president is committed to major tax reform, to real tax reform, to something more than just moving the boxes around,” said Treasury Secretary John W. Snow at the first session of the nine-member panel.

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But several commission members and expert witnesses said their ability to propose radical changes was subject to a number of constraints, some of which were imposed by President Bush when he appointed the bipartisan panel last month.

Former Sen. John B. Breaux (D-La.), the panel’s vice chairman, said that Bush had directed the commission to draft at least one proposal that would retain the current income tax, preserve incentives for homeownership and charitable contributions, assume that Congress would make all of Bush’s previous tax cuts permanent and make sure any additional changes neither raised nor lowered overall tax collections.

In addition, Breaux said, the president told the commission to complete its work in less than six months. “It’s an extraordinarily difficult task,” he said.

A former Internal Revenue Service commissioner, Fred T. Goldberg Jr., told the commission that Bush’s preconditions appeared to rule out the possibility of scrapping the income tax and replacing it with another form of taxation.

“I think it’s impossible,” Goldberg said. “I think that the notion that we’re going to get rid of everything and start over is a waste of time. Once you talk about preserving [the progressive tax] ... about preserving incentives for charity and homeownership, you’ve got an income tax. He’s not going to throw it away and start over.”

Such sentiments would probably disappoint conservative activists, who say the income tax should be replaced because it encourages consumption, penalizes savings and investment, makes U.S. firms less competitive and slows overall economic growth. Defenders of the current system say the income tax remains the fairest way to raise government revenue and can be improved and simplified rather than eliminated.

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Some commission members said they thought the president’s mandate still left them considerable latitude to recommend far-reaching changes in the current tax code.

Among the possibilities they mentioned: supplementing the income tax with a European-style value-added tax, which is similar to a sales levy but is imposed at every level of production; and scaling back or eliminating the alternative minimum tax, which is imposed on affluent taxpayers who claim big deductions.

Although Bush has placed tax code restructuring near the top of his second-term domestic agenda, close behind Social Security, he has been vague about the kinds of changes he wants. He directed the panel to look for ways to make the tax code fairer, simpler and more pro-growth.

Commission members cited a litany of statistics to back up the reform mandate. Since the last major revision in 1986, the tax code has been amended more than 10,000 times and grown to more than 1 million pages. Individuals and businesses spend more than 6 billion hours and more than $120 billion every year to prepare their returns.

“There is nearly universal agreement that we must reform the tax system,” said former Sen. Connie Mack (R-Fla.), the panel’s chairman. “The tax code is a complex and cluttered mess that discourages economic growth and vitality.”

Mack said the panel would have a series of public hearings. Bush has asked the commission to wrap up its work by July 31, and has directed Snow to distill its findings into a final set of recommendations by year’s end.

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In an interview before Wednesday’s hearing, Mack said the panel would not include the Social Security payroll tax in its review. Some Republicans, including House Ways and Means Committee chairman Bill Thomas (R-Bakersfield), want to combine restructuring of Social Security and the tax code into one broad initiative.

“Our basic charge is to look at the corporate and individual income tax,” Mack said.

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