US President George W. Bush, having already set off a firestorm over his proposals to cut taxes and revamp retirement accounts, suggested on Friday that the time might be near to drop the income tax as a whole and replace it with some form of consumption tax.
The idea was outlined in the White House's annual economic report to Congress. The report, prepared by the White House Council of Economic Advisers and signed by Bush, offers a scathing critique of the current system and an exuberant description of radical alternatives.
PHOTO: AP
The report does not make formal recommendations, and White House officials emphasized that sweeping tax overhaul is not an immediate policy goal.
PHOTO: AP
But many administration officials have made no secret of their fondness for fundamental tax overhaul, and the report lays out a detailed rationale for a system that taxes spending rather than income.
By eliminating the complexity and the thousands of arcane preferences in the current tax code, the report says, a consumption tax would not only increase efficiency but promote investment and growth.
"Most estimates suggest that a shift to a consumption tax base would generally increase the size of the capital stock in the long run," the report said. Economic output could increase as much as 6 percent, it added.
Michael Graetz, a professor of tax policy at Yale Law School and a longtime advocate of a tax on consumption, said the report was a clear signal about the administration's long-term thinking.
"It's unusual for something like that to be in the economic report of the president," Graetz said. "I don't believe the president has made a decision about what he would like to do. On the other hand, this shows they are serious about fundamental tax reform."
The idea of overhauling the system is not new. Paul O'Neill, President Bush's first treasury secretary, was a passionate believer in at least simplifying the current system.
Republican lawmakers have periodically campaigned for a consumption tax in recent years. R. Glenn Hubbard, chairman of the Council of Economic Advisers, wrote numerous papers while at Columbia University about the merits of a consumption tax.
At its simplest, a consumption tax would eliminate traditional income taxes for most if not all taxpayers and replace those taxes with some kind of tax on spending. Corporations might still pay taxes, but they would abandon most of the rules for depreciating investment in new equipment or buildings and simply write off those costs as expenses in the same year they occur.
The allure of such systems is their simplicity. Fans of the consumption tax say it will save ordinary taxpayers billions of dollars, eliminate the wasteful gaming of current rules and ultimately be more fair.
Critics of such proposals contend that the political challenges are too daunting, because attacking countless special preferences means challenging innumerable powerful lobbying groups -- from oil companies that want their tax credits for drilling to homeowners who want to save the tax deduction for mortgage interest.
Politically, the most damaging criticism is that a consumption tax could obliterate the idea of a progressive tax system and shift much of the tax burden from the rich to middle-income people and the poor.
A consumption tax would leave investment income tax-free, as investment income flows most heavily to wealthy taxpayers. Beyond that, opponents argue, a consumption tax is "regressive" in that the same rates apply to rich and poor people.
The president's report tries to refute those arguments. In a lengthy section called "Distributional Consequences of Tax Reform," it contends that people move very fluidly between lower- and higher-income brackets through the normal course of their careers.
Using a "lifetime" approach to income distribution, an idea embraced by Hubbard at the Council of Economic Advisers, the report cites studies showing that more than half of people followed over 10 years had moved into a different income bracket at the end of a decade.
"Consumption taxes are generally less regressive when viewed from a lifetime perspective," the report declared. "A one-year snapshot of the distributional effects of many tax changes can be misleading."
Republican lawmakers and policy analysts generally doubt Bush will push for a radical tax overhaul anytime soon, given his already sprawling agenda which includes a likely war with Iraq and the huge tax bills he wants to push through this year.
But if Bush succeeds in pushing through his current agenda, and wins re-election in 2004, the report could turn out to be a blueprint for his goals in a second presidential term.
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