Tax Title of
Fed Chief's Testimony Makes Income/Consumption Tax System
More Likely; Tax-Free Savings/Investments Favored
Reserve Board Chairman Alan Greenspan told President Bush's Tax
Panel on March 3 that a hybrid income and consumption tax would not only
spur economic growth it would also be more likely to get through
Congress than moving the nation to a flat tax or pure consumption tax.
With the panel showing rapt attention, the influential chairman
highlighted some of the advantages and drawbacks of a hybrid system.
Comment. In many ways, the
already has a hybrid system. The
does not tax all income. Many lower-income Americans pay no federal
taxes. In addition, several provisions in the current Tax Code lower the
rate on savings. "To the extent that you're lowering the rate on
savings, you're essentially placing it on consumption," Greenspan
testified at the panel's second round of hearings in
The panel first met in
on February 17 and will be traveling to
later this month for more hearings. President Bush has directed the
panel to look at every way possible way to reform the Tax Code and make
recommendations later this year. Their recommendations likely will be
the blueprint for a comprehensive overhaul of the nation's tax system.
Moving toward a hybrid system
the panel's first meeting in February, several members expressed
interest in a hybrid income-consumption tax system and their interest
seemed to grow at the second meeting. Speaking from prepared remarks,
Greenspan said "a consumption tax would be best from the
perspective of promoting economic growth."
reminded the panel that in the next few years the first members of the
"Baby Boom" generation will start to retire. The country needs
to encourage more savings and, at the same time, create incentives for
working, he said.
Questions about fairness
caution that a consumption tax would not be problem-free. A big issue is
determining how to tax consumption financed by old capital that has
already been taxed. Another concern, expressed by the vice-chairman of
the panel, former Louisiana Democratic Senator John Breaux, is whether a
national consumption tax would be unfair to lower-income taxpayers.
can always put a degree of progessivity into a tax system. Probably the
simplest way is to exclude certain items from the tax, which tend to be
disproportionately consumed in a lower bracket," Greenspan said.
View from the
Everson, while careful not to endorse any proposal for changing the
federal tax regime, urged the panel to get a practical understanding of
how a national consumption tax and other tax regimes would work. He
suggested that the panel might want to take a look at how tax regimes in
other countries, such as a national consumption tax, operate. A number
of European countries have hybrid income-consumption tax systems.
Several eastern European countries have recently enacted flat tax
systems for personal and business income.
also spoke about tax complexity. He waved a copy of
INCORPORATED's 1,192-page Law, Explanation and Analysis of the American
Jobs Creation Act of 2004 to show how many changes one tax law can make.
He highlighted the new manufacturing deduction as an example of a
concept that was simple in theory but complex in implementation.
to individuals, Everson reminded the panel that "people don't even
begin to understand the Tax Code." Individuals are overwhelmed by
the number of credits, deductions and incentives, Everson said.
panel also heard from former Treasury Secretary James Baker who played a
key role in passage of the
Reform Act of 1986. Baker cautioned against reform proposals
that have little political support. "It doesn't do any good to send
something up to get it shot down," Baker told the panel.
Olson, the National Taxpayer Advocate, told the panel that the Tax Code
can be made less complex by simplifying 10 provisions. They are the
Earned Income Tax Credit (EITC), the Alternative Minimum Tax (
), retirement provisions, education provisions, the "kiddie"
tax, worker classifications, family status provisions, e-commerce, joint
and several liability, and mortgage interest rules.