The advisory panel appointed by George W. Bush to recommend changes to the Byzantine US tax system will call for an end to taxes on US companies' foreign profits, eliminating a competitive handicap for US businesses.
The proposal is part of an ambitious slimming down of the tax code proposed by the panel, set up by the president in January. With Mr Bush's plan for Social Security reform foundering, tax reform is expected to rise up the agenda as Republicans prepare their platform for congressional elections in 2006.
The panel, which issues its final report to the Treasury next month, will also propose eliminating or cutting tax deductions on state and local income tax, mortgage interest and healthcare plans. It held its final meeting in Washington on Tuesday.
But to ease the pain, the panel recommends eliminating the tax on dividends, ending the alternative minimum tax on wealthier Americans and making modest cuts to corporate and personal income taxes.
The proposal to abolish tax on the worldwide income of US companies would end a longstanding discrepancy between the US and most competitors. Charles Rossotti, a member of the panel and a former commissioner of the Internal Revenue Service, said evidence suggested the existing system produced no additional revenue and added to the complexity of taxation for US multinationals.
US companies shelter billions of dollars in profits abroad to avoid high US tax rates. A tax holiday that has reduced the tax from 35 per cent to 5.25 per cent has seen more than $225bn in foreign profits repatriated by US companies this year.
The tax panel laid out two schemes, either of which could be embraced by the White House, modified or ignored entirely.
As an alternative to changing the income tax system by removing many loopholes, the panel also proposed a more radical solution to replace the current scheme with a progressive consumption-based tax, largely exempting savings.
Corporate investments could be written off under the latter scheme, a plan the panel believes would boost productivity.
The panel steered clear of trying to make the tax code more or less progressive, saying that the relative burden of taxes would be little changed if its recommendations were adopted.
Tax experts gave a cautious welcome. Chris Edwards, head of fiscal studies at the Cato Institute, said: “Both plans are much better than existing tax law. Both would be a significant simplification and would help promote economic growth.”But the panel has already drawn fire from those who stand to lose. The National Association of Home Builders said curbing the mortgage interest tax deduction would undermine the housing market and the US economy, and Senator Charles Schumer of New York said eliminating the state and local income tax deduction would be “a dagger to the heart of the people of New York”.
