Tax Code Overhaul May Include Hybrid System

A panel set up to recommend changes to the U.S. tax code is considering a hybrid income and consumption tax system, which is favored by the panel's vice chairman.

"Going all-in-one in one direction or going to all-in-one in another direction ... is not, in my perspective, the best way to approach it," former U.S. Sen. John Breaux, D-La., told Dow Jones Newswires after the first meeting of the panel.

The nine-member President's Advisory Panel on Federal Tax Reform, appointed by President Bush, is charged with developing several alternatives to the existing income tax system and provide a report to U.S. Treasury Secretary John Snow by July 31.

One witness, former Internal Revenue Service Commissioner Fred Goldberg Jr., called the existing tax code "a grotesquely complicated system that distorts the allocation of resources and violates common sense notions of fairness."

He said Congress has made more than 10,000 amendments to the tax code since the 1986 tax reform act.

Goldberg said the existing system is heading for a major crisis due to several events: the array of tax breaks that are set to expire in the next decade, the growth of the Alternative Minimum Tax, large federal budget deficits, and the expense of Social Security, Medicare and other entitlement programs. These are the major factors the tax panel must consider when crafting options to the current system, he said.

The panel heard that one in five taxpayers will be forced to figure their income taxes two times — once for the regular income tax and once for the Alternative Minimum Taxa— and then pay whichever amount is more. More people will be affected over the years.

Other witnesses included economists who supported or opposed the consumption tax and Treasury Secretary Snow himself, who urged the panel to make tax preparation easier. He said taxpayers spend 6 billion hours each year readying their returns for the IRS.

"Imagine what this great country could do if we could get a few billion hours back," Snow said.

The panel's next meeting will be March 3 in Washington, D.C.

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