Bush Panel Backs Simplified Tax System

President Bush's tax panel on Tuesday endorsed a drastically simplified income tax system that envisions eliminating most deductions, credits, savings incentives and other tax breaks, replacing them with a few simpler benefits.

Taxpayers would pay roughly the same amount of tax under the simplified system as they do now, panel members said. But most of the confusing tax paperwork would be gone, and complex tax equations that baffle taxpayers would be simplified.

The President's Advisory Panel on Federal Tax Reform is tasked with making multiple recommendations for different tax methods that make income taxes a fairer, simpler and more economically productive system. Its final report is due Nov. 1.

The plan includes savings accounts for retirement and major family expenses very similar to a proposal put forward by President Bush.

The panel would shrink the number of income tax rates from six to four and put 75 percent of individuals and families in the bottom 15 percent tax bracket.

The proposal abolishes the alternative minimum tax, a levy designed to prevent the wealthy from evading taxes but which is increasingly creeping into the middle class. Individuals would not pay tax on roughly three-quarters of the capital gains on corporate stock.

However, the federal tax deduction for state and local taxes paid would disappear. Myriad personal and family tax breaks would be replaced with one family credit.

Benefits and savings accounts for retirement, health and education would be eliminated in favor of three savings accounts, all funded with taxed income that would be allowed to grow and be withdrawn tax free.

One account would let workers save for retirement through their employers. Taxpayers could also put $10,000 every year into each of two accounts, one for retirement and the other for health, education and home-buying expenses. Low income taxpayers could get a savers' credit worth up to $500.

The plan incorporates two ideas discussed at the panel's last meeting. One would convert the mortgage interest deduction to a credit, while also limiting the size of eligible mortgages to the area's mortgage limit as set by the Federal Housing Administration.

Health benefits that businesses provide to workers would be tax free up to $11,500 for families and $5,000 for individuals - the size of the benefit provided to members of Congress.

It retains the earned income tax credit, a benefit designed to lift the working poor out of poverty, but gives workers the option of letting the IRS make that complicated calculation.