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Posted on: Friday, March 4, 2005

Fed chief likes consumption tax as part of reform

By William Neikirk
Chicago Tribune

WASHINGTON — Federal Reserve Chairman Alan Greenspan, kicking off a national debate on overhauling the federal tax system, told a presidential panel yesterday that the United States should consider a tax on consumption, such as a national sales tax, as part of the plan.

Federal Reserve Chairman Alan Greenspan said creating a hybrid tax system featuring income tax and a tax on consumption, such as a national sales tax, would be simpler than replacing one with the other.

Kevin Wolf • Associated Press

Greenspan acknowledged that simply replacing the income tax with a consumption tax would be so complex and controversial that it would be preferable to have a hybrid tax system featuring both levies. Otherwise, he said, "I would suspect that the opposition that would arise probably would make such a structure infeasible."

Most observers consider the idea of a national sales tax a long shot. But Greenspan's comments on the topic showed how far-ranging the discussion is likely to be on tax reform, a subject that President Bush has described as a top domestic priority for his second term, along with Social Security.

James Baker, who served as treasury secretary and secretary of state under Bush's father, told the panel that a consumption tax "could certainly meet the fundamental criteria of being simple, fair and pro-growth."

Bush has asked the panel, jointly headed by former Sens. John Breaux, D-La., and Connie Mack, R-Fla., to gather facts on the tax system and make recommendations that will form the basis of any restructuring plan he might send to Congress.

It was the second straight day that Greenspan, who is retiring early next year, made a big economic pronouncement. In testimony before Congress on Wednesday, he urged lawmakers to overhaul Social Security and Medicare as soon as possible because of a looming federal deficit, and he gave stronger support to the president's Social Security personal accounts than he had in a congressional appearance last month.

Although adoption of a sales tax-like levy in the United States is considered unlikely, testimony on its behalf by a respected economic figure like Greenspan gave the idea a lift. Critics say consumption taxes put a greater burden on low-income Americans, who spend a greater share of their earnings than the well-to-do.

House Speaker Dennis Hastert, R-Ill., has come out in favor of a national value-added tax, a consumption tax similar to those in Europe, to replace the income tax system. A handful of members of Congress also have endorsed various forms of the sales tax.

Greenspan's suggestion came before the President's Advisory Panel on Federal Tax Reform, which is to report its recommendations on restructuring the tax system to Treasury Secretary John Snow by the end of July.

Bush said he would await the panel's report before deciding on any proposals. "I believe a simplified tax code will spur entrepreneurial activity," he said.