Presidential commission considers plan to add a national sales tax

Two-tier system among options weighed at panel's first meeting on overhaul

February 17, 2005|By KNIGHT RIDDER/TRIBUNE

WASHINGTON - The presidential commission on tax overhaul is considering a proposal to add a national sales tax or some similar levy to the federal income-tax system.

The two-tier tax plan was one of several ideas floated yesterday at the commission's first meeting, but panel members stressed that it is far too early to reach any decisions. The nine-member commission has until July 31 to deliver its recommendations to the White House.

Any tax-law changes as sweeping as those under review would affect every economic interest group in America, shift trillions of dollars within the economy and be the object of intense lobbying in Washington.

Republicans in Congress are also weighing possible tax-law changes as complements to their goal of overhauling Social Security, but they have no firm plan yet and no timetable. It is unclear how much they will coordinate with the tax commission.

Panel members said they would examine a broad range of options, including scrapping the income tax and replacing it with a national sales tax or some other type of tax on consumption. Grafting a sales tax onto the income tax would create a hybrid system. Consumers would pay federal taxes when they purchased something and when they filed their annual income-tax returns.

A new federal sales tax presumably would lead to lower income-tax rates because President Bush has insisted that a tax overhaul must not result in any net tax increase.

"The president's committed to major tax reform, to real tax reform," Treasury Secretary John W. Snow told the panel. "I know it isn't easy. There are few things more complex than trying to improve tax policy."

The commission's first meeting underscored just how hard it will be. Tax expert Fred Goldberg, a former Internal Revenue Service commissioner, urged the panel to focus on improving the system rather than scrapping it.

"The notion that we're going to get rid of what we have and start over is a waste of time," he said. "That doesn't preclude you from doing radical reform."

Goldberg and other tax experts essentially gave the panel three options: Simplify the current system; move toward a consumption tax; or seek a middle ground between the two.

While the current system taxes income, a consumption tax targets only the money that consumers and businesses spend. Income that is used for savings and investment wouldn't be taxed. The most common consumption taxes are sales taxes and value-added taxes. Several European countries use a combination of VAT and income taxes.

The current federal income-tax system is already something of a hybrid because some tax breaks shield income that is used for savings and investment. For example, money that is put into individual retirement accounts isn't taxed until it's withdrawn, usually years later.

Several commission members expressed interest in proposals that would encourage more savings and investment, which economists consider crucial for economic growth. Options include lifting the limits that phase out IRA tax breaks for wealthier people or creating tax-deferred savings accounts.

Former Sen. John B. Breaux, the commission's vice chairman, signaled that he's leaning toward proposals that combine elements of an income tax and a consumption tax. "I'm not looking at it as either-or. I'm looking at it as some kind of combo," the Louisiana Democrat said.

The commission's chairman, former Republican Sen. Connie Mack of Florida, said the panel would focus on problems with the current system before discussing possible alternatives in any detail. "There is nearly universal agreement that we must reform the tax system," he said.

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