Lawmakers and experts who support fundamental tax reform are eyeing a consumption-tax plan being worked out by the Bush administration that they believe if implemented would make the U.S. tax code much simpler to follow and be a boon to economic growth.
The administration’s plan, first reported by the Washington Post last month, calls for shifting the tax system away from taxing income and targeting consumption instead. The paper reported that administration tax policy wonks within the Treasury Department are still working out the details, and that their progress has largely been kept under wraps.
Officially, White House tax-policy experts have spent the past year working on reform options to present to the president, but “economists and tax lobbyists close to the effort believe that Treasury Secretary Paul H. O’Neill is serious about elevating tax reform on Washington’s agenda,” said the Post.
Some experts and lawmakers have long complained that the government’s system of taxation is painfully complex, difficult to administer, too costly and inefficient. The labyrinth of rules and regulations – mostly the work of a Congress seeking to curry favor with constituents and business interests – grows increasingly more convoluted by the year.
While it may not be a panacea for hard-core tax opponents, a consumption-based system is seen at least as a more equitable way of raising the money necessary to fund government functions, according to supporters.
“The Bush administration’s plan to move toward a consumption-based tax is a winner on all fronts,” says Chris Edwards, the libertarian CATO Institute’s director of fiscal policy. “A consumption-based tax would be simpler, more efficient, pro-growth and fairer to taxpayers.”
In a policy briefing, Edwards said a consumption tax would not only benefit consumers, but the businesses they patronize as well.
“On the business side, a consumption-based tax would scrap the complex depreciation system for immediate capital expenses. That reform would make U.S. businesses much more competitive in the world economy and create an investment boom that would drive Americans’ wages higher,” he said.
“On the individual side, a consumption-based tax could be arrived at by greatly expanding the Roth IRA and turning it into a Universal Savings Account. That would boost the savings rate and increase financial security for all Americans,” Edwards added.
Consumer spending comprises two-thirds of the U.S. economy and was credited with helping curb a recession in 2001.
The consumption tax is also a staple of Americans for Fair Taxation, a tax-reform group that says taxing goods and services is simpler and fairer.
“Georgia is a prime example of the power of the frustrated taxpayer. In several congressional races and one Senate race, Fair Tax supporters and angry taxpayers worked to produce major upsets in support of pro-Fair Tax candidates. We witnessed this in other key races across the nation,” says Genie Hayes, a spokeswoman for the group.
“We expect that these recent political victories will solidify the White House’s decision to make tax replacement … into a key part of the president’s agenda,” she added.
Hayes said the Post report “confirms what we have been told by Washington insiders for the last two years – President Bush is listening to the American taxpayer.”
“Any tax reform must result in a tax code that is simple, fair, voluntary, transparent, border neutral, industry neutral, strengthens Social Security and has manageable transition costs,” said Rep. John Linder, R-Ga., in The Washington Times Oct. 28.
“These neutral principles would all be fulfilled by my proposal to eliminate all income and payroll taxes and replace them with a national retail sales tax,” said Linder, author of the Fair Tax Act of 2001.
That’s a good idea, says Rep. Ron Paul, R-Texas, as long as Americans don’t end up with both an income tax and a consumption tax, as is the case in most of Europe.
“My worry,” he told WorldNetDaily, “is that somewhere down the road, after we replace the income tax with a consumption tax, the American people will get saddled with an additional income tax.”
Critics of a consumption-based sales tax say adding a levy at the point of sale would likely lead to less consumer spending, thereby worsening a weakened economy. Also, they say a national sales tax would have to be astronomical for the government to collect its current level of revenues.
William Gale, a senior fellow in economic studies at the Brookings Institute, a public-policy think tank, estimates that proposals to replace virtually all federal revenues with a 23 percent tax-inclusive national sales tax rate are based on assumptions that real government spending would decline by $480 billion per year, and that there would be no tax avoidance, evasion or political erosion of the tax base.
“Correction for these assumptions indicates that the required tax-inclusive rate would be over 50 percent,” he writes in a 1999 policy paper.
But some economists say reducing income taxes means Americans will have more disposable income – and will spend it.
Indeed, the Commerce Department reported earlier this month that “robust” consumer spending contributed to third quarter economic growth at twice the rate of growth in the second quarter of this year. GDP climbed at a 3.1 percent annual rate in the three months from July to September, up from the preceding quarter’s 1.3 percent rate.
“The largest contributors to the step-up were an acceleration in consumer spending – especially for motor vehicles – and a slowdown in imports,” said the department.
Other critics support tax cuts as a way to reduce government spending.
“The tax shift is one of the great games of government. In the game, the government uses the prospect of lowering one tax in order to buy support for raising another,” says Lew Rockwell, president of the Ludwig von Mises Institute, a libertarian economic think tank based in Auburn, Ala. “The proposal to move from an income tax to a consumption tax is a good example of the game.”
Rockwell told WND that “the essential key to understanding the trick is to realize that the government wants money and is going to get it one way or another.”
“Zigzagging from one method to another does not change the reality, but it can fool the gullible. And it can raise a lot of money from affected groups during the transition period,” he said.
Fundamentally, Paul agrees. He also believes that for Americans to achieve real tax reform, the government has to become more frugal.
“I think if we waved a wand today and had a sales tax implemented and the income tax removed, we really don’t solve a lot of our problems because we still have the (government) spending side to deal with,” he said.
Other experts say that millions of Americans are paying more than their fair share of taxes under the current system.
“The total tax burden on Americans is – and will remain – at near-record levels,” says an assessment by the Heritage Foundation, a public-policy think tank in Washington, D.C. “Marginal tax rates are far too high, savings and investment are still subject to discriminatory taxation, and needless complexity in the Internal Revenue Code foments corruption and adds a hidden compliance tax on productive activity.”
Rockwell says the argument for a consumption-versus-income tax rests on a few key principles.
Supporters claim “the consumption tax is at least voluntary,” he said, but “actually, it is just as coercive as any tax.”
“Under the income tax, if I earn income and don’t pay the tax, I can be fined and jailed,” said Rockwell. “Under the consumption tax, if I consume a taxed item and don’t pay the tax, I get fined and jailed.
“It’s true that I can choose not to consume that item. Similarly under the income tax, I can choose not to earn income,” he added. “Nothing is voluntary if I am not permitted to exempt myself. There is no such thing as a voluntary tax. If there were, it would be called something else.”
Meanwhile, now that Republicans are back in control of both houses of Congress, the administration will seek to make a set of tax cuts set to expire in 2010 permanent, while working on another tax-cut package to include reducing the taxation on share dividends, the Financial Times reported last week.
The new tax cuts, in addition to the Federal Reserve’s half-point cut last week in the rate banks charge each other for overnight loans, will be aimed at helping consumers reduce personal debt and get their own financial houses back in order without inducing another slowdown, according to White House economists.
“If we look at the personal savings numbers, the reach for excess in the 1990s is being unwound,” said Larry Lindsey, Bush’s chief economic adviser. “I think that will continue, and it makes it incumbent on us to maintain real personal disposable income.
“The tax code is a luxury the economy can no longer afford,” he said this week.
Others were more pointed.
“While Republicans will control Washington, they’ll also be under the gun to deliver an economic turnaround,” said an analysis last week in BusinessWeek magazine. “If they pull it off, they can look forward to an even giddier Election Night 2004. If not, there won’t be much room for excuses.”
Paul was not optimistic.
“I don’t think any more will happen [on tax reform and reduction] now than happened during the Reagan administration or since Republicans took over the House in 1994,” he said.
“The one thing no one should expect, despite the rhetoric, is that their taxes are going to go down, because government needs money now more than ever,” Paul added. “I hope there’s serious debate, but I don’t see much happening.”