Greenspan proposes consumption tax to boost economy

WASHINGTON -- Federal Reserve Chairman Alan Greenspan said Thursday that a new consumption tax -- such as a national sales tax -- could spark the economy as a partial replacement for income taxes.\nGreenspan cautioned that there would be both political and administrative difficulties in moving toward a new national tax system. Simplification is needed, perhaps a hybrid between consumption taxes and income taxes, he told the President's Advisory Panel on Federal Tax Reform.\n"In other words, don't try for purity," Greenspan said in response to a question from a panelist.\nPitching toward a pure consumption tax would arouse such opposition as to make the idea "infeasible," he said.\nDemocrats raised alarm about potentially crippling taxes on food and medicine when the possibility of a national sales tax came up last fall during the presidential election.\nThe panel's vice chairman, former Sen. John Breaux, D-La., said it was important that the Fed chief asserted income and consumption taxes could work together.\n"He said you could do both," Breaux said. "I don't think he endorsed it, but his saying that it can work, like many other countries have done, I think was a very significant statement."\nBush'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.\nAddressing concerns about increased taxes on necessities like food, Greenspan said policy-makers could design a consumption tax that would exclude products mostly consumed by the poor.\nA consumption tax could take several forms, such a national sales tax or a value-added tax, used by some European countries. Value-added taxes are imposed on the increased value of a good or service at each stage of manufacture and distribution and ultimately passed on to the consumer.\nConsumption taxes are one of many options under consideration by the president's tax panel, charged with studying tax laws and offering several blueprints this summer to make taxes fairer, simpler and less burdensome on the economy.\nGreenspan said economists believe a consumption tax would best promote investment and growth. "However, getting from the current tax system to a consumption tax raises a challenging set of transition issues," he said.\nConsumption taxes also got a nod of approval from former Treasury Secretary James A. Baker III, who labored over the last major tax reform in the 1980s.\n"While I am no expert on the subject, I believe that consumption-based taxation has much to commend it, and if properly crafted, a consumption tax could certainly meet the fundamental criteria of being simple, fair and pro-growth," he said.\nLike Greenspan, Baker also warned of the political challenges involved in advocating a consumption tax or pushing for elimination of popular tax breaks.\n"A pragmatic assessment of political reality can give reform momentum," he said.\nBaker recounted a 1984 Treasury proposal that advocated limiting the deductions for home mortgage interest and eliminating the deduction for state and local income taxes, which quickly failed the test of political viability.\nGreenspan didn't offer a specific approach for policy-makers to follow as they consider an overhaul of the tax code. However, he did advocate for "some semblance of predictability in the tax code" and joined virtually all of the tax experts called before the panel in calling for simplification of tax laws.\n"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," he said.