Sat, 05 Mar 2005
From: AFP

Greenspan raises idea of consumption tax in U.S.

Agence France-Presse Washington

Federal Reserve Chairman Alan Greenspan said on Thursday that a consumption tax, like the European-style value-added tax, should be considered as part of U.S. tax reform efforts.

Greenspan, appearing before a presidential tax advisory panel, said he believed a hybrid tax system, combining a consumption tax and the current income tax, may be the best approach to overhauling the U.S. tax code.

The central bank chief said any reform should aim to simplify the tax code, making compliance easier, and to make the system more predictable for households and businesses.

"Many economists believe that a consumption tax would be best from the perspective of promoting economic growth -- particularly if one were designing a tax system from scratch -- because a consumption tax is likely to encourage saving and capital formation," Greenspan said.

"However, getting from the current tax system to a consumption tax raises a challenging set of transition issues."

As a result, Greenspan said a combination of the two tax systems "might be the best route to go."

Critics of a consumption tax, which could take the form of a national sales tax, argue that it would be regressive, having a disproportional impact on low-income households.

Proponents say that if coupled with elimination of most income and other taxes, it might end double taxation and free more resources for economic growth.

Greenspan said a simpler tax code would result in a "better use of resources," but warned that efforts to overhaul the system will inevitably create winners and losers.

He said the oncoming retirement of the 'Baby Boom' generation underscores the need to examine the choice of a tax base and other elements of the tax code.

"I believe that as the Baby Boom generation begins to retire in a few years, it will become increasingly important for the nation to boost resources available in the future through greater national saving and enhanced incentives for participation in the labor force," Greenspan said.

The tax system can contribute to those goals, he said, adding that "at a minimum, tax reform should not hinder the achievement of those goals."

Greenspan said tax reform efforts will inevitably require tradeoffs among competing objectives. Accomplishing tax reform in the past has therefore required a bipartisan effort, Greenspan said, citing tax overhauls conducted in 1954, 1969 and 1986.

Greenspan made no comments on monetary policy in his prepared remarks. Thursday's event was the tax panel's second public hearing.

President George W. Bush has described overhauling the tax code as a key component of his domestic agenda, but it has paled in emphasis next to his top item: adding private investment accounts to Social Security.

The administration has insisted that any final tax proposal be "revenue-neutral," in other words, it must raise the same amount of revenue as the current tax system.

But the new talk of a consumption tax raised the ire of retailers.

"We are extremely distressed to hear Chairman Greenspan speak favorably of any form of consumption tax," said Steve Pfister of the National Retail Federation.

"A National Retail Sales Tax or VAT (value-added tax) would devastate the nation's economy for years before economic gains -- if any -- would be seen."





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