Greenspan likes idea of consumption tax

updated 4:39 p.m. ET March 3, 2005

WASHINGTON - Federal Reserve Chairman Alan Greenspan Thursday said some form of a consumption tax — such as a national sales tax — could spur greater economic growth, but he acknowledged that a hybrid approach might be more politically realistic.

Switching from an income tax to a consumption tax would generate huge opposition from Democrats, who argue that a greater burden would fall on the poor because they spend a far higher proportion of what they earn.

Acknowledging those concerns, Greenspan told the President’s Advisory Panel on Federal Tax Reform that policy-makers might want to consider a combination of an income- and consumption-based system.

“I would suspect that probably that may be the best route to go. In other words, don’t try for purity,” Greenspan said in response to a question from a panelist. “I would suspect that the opposition that would arise would probably make such a structure (a pure consumption tax) infeasible.”

Addressing concerns about increased surcharges on food and other necessities, Greenspan said policy-makers could design a consumption tax that would exclude some products.

In his prepared remarks to the panel, the Fed chief said that “a consumption tax would be best from the perspective of promoting economic growth” because it would encourage saving and the capital formation that the economy needs to expand and modernize.

“However, getting from the current tax system to a consumption tax raises a challenging set of transition issues,” he added.

Greenspan also said he supported tax incentives to encourage savings, largely because they affect the behavior of Americans saving for retirement.

“And that, especially in the context of the discussions we’ve all been having the last couple weeks relevant to retirement funding and the like, is clearly something which is desirable,” he said.

The Fed chief delivered his assessment to the panel a day after worrying aloud before a House committee about the buildup of budget deficits in recent years. The tax-reform panel is looking into ways to revamp the complex tax code, an important goal of President Bush.

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