Tax Panel: Limit Deductions, Lower Rates
Nov. 2, 2005 -- The President's tax-reform advisory panel submitted two proposals on Tuesday to the Treasury Department, including recommendations that would end the controversial Alternative Minimum Tax, limit health insurance deductions, and place caps on mortgage-interest deductions.
The panel, established in January, made the case for the elimination of the Alternative Minimum Tax, which was originally created to ensure individuals in higher tax brackets be required to pay a minimum amount, in an effort to keep them from ducking taxes through deductions and credits. But because of the broad definition of those required to pay the alternative minimum each year, and the fact that income-exemption levels were never tied to inflation, the AMT affects a growing number of middle class families -- 2.6 million in 2003 and an estimated 13 million in 2005, according to the Congressional Budget Office.
The panel claims that eliminating the tax would result in a $1.2 trillion dollar loss over 10 years. To make up for the lost revenue, the panel has been considering different changes to the tax code. The focus has shifted to health insurance and mortgage-interest deductions, which will cost the government almost $250 billion this year alone.
Currently, employers can deduct the entire amount they pay for workers' health insurance. The proposal limits this to $5,000 for an individual and $11,500 a year for a family policy. The proposal also allowed those who pay for their own health insurance to receive the deduction.
Along with health-care deductions, mortgage-interest deductions may be altered. Currently, interest on mortgage loans up to $1 million is deductible. The proposal makes the deduction a credit, and limits it to the average regional housing price, a figure ranging from $227,000 to $412,000.
The panel also suggested reducing the number of brackets of income tax from six to four, leaving rates at 15%, 25%, 30%, and 33%. Previously, 35% was the top percentage. It was also recommended to reduce the different types of 401(k)s to a single account with streamlined rules.
Other suggestions include reducing taxes on investments, reducing the marriage penalty, no longer allowing state and local taxes as a deduction on federal taxes, and simplifying the 1040 form from 75 to 32 lines and from 52 schedules and worksheets to 10.
The National Federation of Independent Business, a longtime proponent of tax reform, expressed early support for the recommendations. "We are pleased to see that the panel has focused on simplicity and fairness, recognizing the vast differences in tax burdens for small businesses and large corporations," Dan Danner, executive vice president of NFIB, said in a statement. According to the group's estimates, some 85% of small businesses file their tax returns as individuals.
The bipartisan panel's recommendations will be reviewed by the Treasury Department before going to President Bush. As an advisory committee, the panel's suggestions are not legal in any way, nor does the President have to stand by them. Any changes to the tax system would have to pass through Congress, where the changes are likely to face opposition.