WASHINGTON -- Declaring that the income tax system ''has become a running joke," a presidential panel recommended yesterday that the nation's tax laws be overhauled by replacing almost all deductions and credits with simpler benefits for more taxpayers.
Treasury Secretary John W. Snow said he would study the report, issued by the President's Advisory Panel on Federal Tax Reform. He said he hoped to present formal recommendations to President Bush this year.
''These are bold recommendations," Snow said. ''These are recommendations that will challenge orthodoxy in a lot of ways on tax policy."
The nine members of the commission said many major recommendations would be unpopular.
''Many stand waiting to defend their breaks, deductions, and loopholes and to defeat our efforts," the group said in a letter to Snow.
Tax rates would be lower for individuals and businesses under two alternative tax systems endorsed by the panel.
Both plans would eliminate most deductions and credits, in an effort to simplify complicated calculations. The second of the two tax systems aims to reduce taxes on savings and investments made by businesses and families.
In place of the current tax breaks, the panel would create a few tax credits and three savings accounts that they said would encourage homeownership, charitable giving, and saving, while also supporting lower-income workers and their families.
The panel sharply criticized lawmakers' tendency to use the tax code to promote policy agendas. Members said there had been 15,000 changes in tax laws since the last overhaul, in 1986.
Snow and the panel's members urged lawmakers and taxpayers to look at the package as a whole, rather than to concentrate solely on the benefits to be lost.
Very quickly, however, the panel heard criticism of their decisions to limit or scrap deductions for mortgage interest, health insurance premiums, and state and local taxes.
''Unfortunately, President Bush's tax panel is a Trojan horse, using so-called simplification to cut taxes for the wealthy while increasing taxes for middle-class families," said the House minority leader, Nancy Pelosi, Democrat of California.
Senator Jim DeMint, Republican of South Carolina, said the recommendations do not go far enough. ''We need comprehensive reform that will make America the best place in the world to invest and do business," he said.
A specialist, C. Clinton Stretch, director of tax policy for Deloitte Tax LLP, said, ''It's hard to see how they overcome some of the intrusions onto really pretty sacred territory."
Specifically, the panel said the mortgage interest deduction should be replaced with a credit worth 15 percent of the mortgage interest paid, to spread the benefit to more homeowners of modest incomes. The panel also recommended that the government lower the $1 million limit on mortgages eligible for the tax break to the average regional price of housing, ranging from $227,000 to $412,000.
Tax breaks for mortgages on second homes and home equity loans would be eliminated.
In another major change, taxpayers could purchase health insurance using untaxed money of up to about $5,000 for an individual and $11,500 for a family, a change that would cap currently unlimited breaks but would create a tax break for those who do not get health insurance through their employers.