Greenspan likes idea of consumption tax

Consumption taxes can take the form of national retail sales taxes or a value-added tax, imposed on the increased value of a good or service at each stage of manufacture and distribution and ultimately passed on to the consumer.

Bush’s advisers have spoken favorably of the economic benefits that could be achieved by moving from a system that taxes income to one that taxes consumption.

Democrats, on the other hand, are concerned about such a change. “I have a problem with the consumption tax because I believe it would be regressive,” said House Democratic leader Nancy Pelosi of California.

While Greenspan did not specify what types of transition problems would be faced in moving toward a consumption tax in his prepared remarks, he did tell the panel he is concerned about the issue of taxing capital investments under the consumption tax. “This is the issue that bedeviled the 1986 commission and ultimately led them to abandon the consumption tax idea,” he said.

Bush’s aides have pointed out that the current tax system is actually a combination of a system that taxes income and one that taxes consumption. They note the creation of individual retirement accounts and other tax-deferred savings accounts allows taxpayers to shelter some investment earnings from tax.

Greenspan told the panel members in his prepared comments that they will have to decide what type of system to use such as “a comprehensive income tax, a consumption tax or some combination of the two, as is done in many other countries.”

The tax panel is responsible for coming up with recommendations to make taxes fairer and simpler. In addition to revamping Social Security, Bush wants to overhaul the nation’s tax system — two centerpieces of his second-term economic agenda. Achieving both will be difficult politically and economically, especially against the backdrop of swollen budget deficits, analysts say.

Greenspan didn’t offer a specific approach for policy-makers to follow as they consider an overhaul of the tax code.

But he did say that changes should be aimed at making the tax code easier for Americans to navigate, be fair and should contain an element of predictability so that businesses and consumers alike can look into the future and have a good idea what their tax obligations are — allowing them to plan ahead.

“A simpler tax code would reduce the considerable resources devoted to complying with current tax laws, and the freed up resources could be used for more productive purposes,” Greenspan said.

The panelists later heard about one of the most complex and vexing parts of tax law — the alternative minimum tax.

Enacted in the 1960s after an outcry erupted when government officials determined 155 individuals paid no income tax, the levy aims to prevent wealthy people from sheltering their entire income from taxation. It has since grown into a second layer of taxation that creeps further toward the middle class each year.

Thomas Rinaldi, who runs a commercial kitchen installation business in Katonah, N.Y., submitted a statement about his experience with what he called the “stealth” tax.

“No matter how many times I ask my accountant to explain it to me, I still can’t figure out why I have to pay AMT even though I went to four years of college and minored in mathematics,” he said.

Leonard Burman, co-director of the Urban-Brookings Tax Policy Center, read some of the IRS instructions for computing the alternative minimum tax to the panel. “I have no idea what that means. That’s why I use TurboTax,” he said.

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