Fed chief touts national sales tax

WASHINGTON -- Alan Greenspan helps steer the world's largest economy. He digests mountains of detailed statistics every day. The nation's tax laws are too complicated even for him.

The chairman of the Federal Reserve told the president's tax reform panel Thursday that "tax code drift" has turned taxes into a dense and complex thicket that most people can't understand.

"Indeed, an individual taxpayer may have difficulty even knowing his or her marginal tax rate because of the overlapping web of deductions and exemptions and the provisions that attempt to limit those deductions and exemptions," he said.

Simplification is needed, perhaps a hybrid between consumption taxes and income taxes, Greenspan told the President's Advisory Panel on Federal Tax Reform.

A new consumption tax -- such as a national sales tax -- could spark the economy as a partial replacement for income taxes.

Greenspan cautioned that there would be both political and administrative difficulties in moving toward a new national tax system.

"In other words, don't try for purity," Greenspan said in response to a question from a panelist.

Pitching toward a pure consumption tax would arouse such opposition as to make the idea "infeasible," he said.

President Bush told reporters he would reserve judgment about new tax systems until the panel makes its report, but he said he backed changes to reduce complexity.

"I've told the American people I want to work to simplify the tax code, to make it easier to understand, so people [are] spending less time filing paper," Bush told reporters.

Democrats 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.

The 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.

"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."

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.

Addressing 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.

A 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.

Consumption 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.

Greenspan 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.

Consumption 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.

"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.

Like Greenspan, Baker also warned of the political challenges involved in advocating a consumption tax or pushing for elimination of popular tax breaks.

"A pragmatic assessment of political reality can give reform momentum," he said.

Baker recounted a 1984 U.S. 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.

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.