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Bush defers tax code overhaul

Changes expected to be incremental

WASHINGTON -- Wholesale changes to the tax code that just weeks ago were identified as a Bush administration goal by the end of 2005 are being pushed back for at least another year.

White House economists, Republican tax aides in Congress, and outside economic advisers say key White House officials have determined that they have their hands full with Bush's pledge to overhaul Social Security and a budget plan that will demand politically painful cuts to nondefense spending.

The president will soon name a panel to examine tax policy, but he will leave it to the Treasury Department to monitor the group's work. It is widely expected that Treasury Secretary John W. Snow will ultimately recommend incremental changes to the tax code -- not replacing it with a new system, such as a single flat income-tax rate or a national sales tax, according to these sources.

"The likelihood of a really dramatic change is fairly low," said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute.

"They're sort of punting," said one economic adviser outside the White House who maintains strong contacts with administration economists, contending that Bush is not likely to turn his attention to the tax issue until 2006 and will do so then only if the Social Security and budget issues have been resolved.

Claire Buchan, a White House spokeswoman, said an overhaul of the tax code remains a Bush priority, noting that the White House economic conference held this month devoted a panel to tax simplification.

But the president may have tipped his hand during that two-day conference when he devoted his time to Social Security changes and limits on civil lawsuits. His one mention of tax simplification was when he reiterated his support for the permanent repeal of the estate tax, a move Bush said would eliminate 300 pages of the Internal Revenue Code.

"I think the president signaled that he is going 'incremental' on tax reform, not radical," a policy aide who recently left the White House said after Bush's speech.

Since the conference, tax policy analysts and business lobbyists have been looking for clues in a 2002 study done by the Treasury Department. Its author, former assistant Treasury secretary for tax policy Pamela F. Olson, said she has been fielding a steady stream of calls about the report, especially about its fifth, most incremental tax option.

Under what has become known among lobbyists on K Street simply as "Option 5," Bush's previous tax proposals would be enhanced, not replaced. Washington would create lifetime savings accounts and retirement savings accounts to replace the current array of tax-preferred savings accounts for retirement, education, and healthcare.

A lifetime savings account would allow each person to save up to $5,000 a year, shielding capital gains, interest, and dividend income from all taxation. Unlike existing tax-favored accounts, the money could be withdrawn at any time for any reason. A family of four could shield $20,000 a year from investment taxation, and since few families could save that much, capital gains, interest, and dividend taxation would effectively end for the vast majority of Americans, the Treasury study said.

The plan would also repeal the alternative minimum tax, the parallel income-tax system that was set up to ensure the rich pay taxes but that increasingly ensnares the middle class. For low- and middle-income taxpayers, the standard deduction would be significantly increased.

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