'Consumption Tax Will Come at A High Price', Says Greenspan

by Mike Godfrey, Tax-News.com, Washington

07 March 2005

Testifying before the Presidential tax reform advisory panel last week, Federal Reserve Chief Alan Greenspan acknowledged that a switch to a consumption-based tax system would have benefits in terms of enhanced economic efficiency, although he cautioned that the transitional costs involved may be too high a price to pay.

Whilst Greenspan did not overtly express support for any one of the proposals which have been mooted to help simplify the income tax system, he pointed to the success of President Reagan’s tax reform of 1986 as a possible template for future reform.

“Since the exemplary 1986 reform, the tax code has drifted back to be overly complicated and burdened by higher marginal rates and by many special provisions that have undesirably narrowed the tax base,” observed Greenspan.

The Fed Chief went on to note that the defining achievement of the 1986 reform was that taxation was cut, whilst the tax base was broadened. He also observed that the Reagan-era reform managed to simplify the tax system, and suggested that future efforts should seek to restore the tax code to a similar condition.

“It is perhaps inevitable that, every couple of decades, drift needs to be addressed and reversed,” he suggested.

Turning his attention to alternative tax systems, Greenspan told the panel that a consumption tax would be the most preferable option in terms of promoting economic growth by encouraging people to save and aiding capital formation, although he observed that designing a new system from scratch would come at a cost.

“Getting from the current tax system to a consumption tax raises a challenging set of transition issues,” he remarked.

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