US Tax Panel Hears Consumption Tax Proposals

by Mike Godfrey, Tax-News.com, Washington

13 May 2005

Advocates of consumption taxes gathered in Washington on Wednesday and Thursday in an attempt to sell their ideas of radical tax overhaul and the replacement of the current income tax system with various forms of 'flat taxes' to the Presidential advisory panel on tax reform.

Under a plan drawn up by Michael Graetz, a Yale Law School professor, the current income tax system would be scaled back and combined with a European-style value added tax, which imposes a levy on the increased value of a product at each stage of production.

This plan would see consumers pay a 13% to 14% value-added tax on their purchases. Individuals earning less than $50,000 and families making under $100,000 no longer would pay income taxes under such a plan. Those still paying income taxes would get a simplified system and a top tax rate of 25%

Another proposal advanced by pressure group Americans for Fair Taxation calls for a flat consumption tax levied at 23% with exemptions for those on low incomes. Meanwhile, David Burton of the Free Enterprise Fund, would reduce the rate to 8.4% for individuals by also levying the tax on businesses.

However, not all observers are convinced of the merits of such a radical shift away from income tax and towards the taxation of consumption, not least the chairman of the tax panel, the former Republican Senator Connie Mack.

Whilst Mack found the ideas "very intriguing," he went on to ask: "if this is such a great idea, why haven't other political entities around the world pursued it?"

Meanwhile, Ernest Christian, director of the Center for Strategic Tax Reform, questioned the need to go looking for an "exotic import" that is so at odds with the US tax system: "Why go searching for some new, magic elixir with unknown results?"

US retailers are also opposed to the idea of a national sales tax, warning the move would have a disastrous effect on the US economy and lead to an eight-year decline in consumer spending.

"Our nation's federal tax system needs work, but a consumption tax is not the answer," NRF Vice President and Tax Counsel Rachelle Bernstein said.

Bernstein continued:

"Consumer spending has been the backbone of the US economy in recent years, and huge new consumption taxes would send a message to consumers to stop spending. Americans whose jobs depend on consumer spending can't afford to take that risk.

"Consumption taxes are horribly regressive. Poor families get taxed at a high rate on virtually all of their income because they spend most of what they earn, while the wealthy get a tax break because they spend a relatively small portion of their income. And the elderly are forced to pay tax a second time around as they spend savings that have already been taxed. One group calls its plan the 'Fair Tax,' but it's really the 'Unfair Tax.'"

The NRF is particularly concerned by a proposal for a National Retail Sales Tax sponsored by Representative John Linder, R-Ga., which would replace the current federal tax system with a 30% national sales tax in addition to existing state and local sales taxes.

A study commissioned by NRF in 2000 found that a national sales tax would bring a three-year decline in the economy, a four-year decline in employment and an eight-year decline in consumer spending.

The congressional Joint Taxation Committee says it would take a 57% tax to replace all federal tax revenue rather than 30%. That calculation assumes that all new goods and services are taxed. If any exceptions are allowed, the rate would go higher.

The Tax Panel has been ordered by President Bush to draw up tax reform proposals by July.

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