US Think Tank Touts Federal Sales Tax

by Mike Godfrey, Tax-News.com, Washington

19 November 2010

The US Bipartisan Policy Center Task Force has disclosed a comprehensive plan which, it says, would to solve America's problem of large federal deficits and debt while simplifying taxes for businesses and individuals, and creating up to seven million new jobs.

It was said that the plan, entitled “Restoring America’s Future”, from the Task Force, which is co-chaired by former Senate Budget Committee Chairman Pete Domenici and former White House Budget Director Alice Rivlin, would reduce the federal debt to below 60% of the economy, reduce annual deficits to manageable levels, and balance the primary budget (except for interest payments) by 2014.

The Task Force stressed that it sees a strong economy as the starting point for any effective plan to reduce deficits and debt, and its plan takes steps to strengthen the economy both immediately and in the long run.

For the short-term, the plan proposes a “payroll tax holiday” for 2011, suspending social security payroll taxes for employers and employees, in a move that would immediately add money to employee wages while incentivizing companies to hire new workers. This tax cut of nearly USD650bn would, it was said, provide a “big shot in the arm” to revive the US economy and, as estimated by the Congressional Budget Office, could create as many as seven million jobs.

The plan would then phase in the steps to reduce deficits and debt gradually, beginning in 2012 when the economy would then, hopefully, be strong enough to absorb them. Domestic discretionary spending would be frozen for four years and defense discretionary spending for five years, while savings would be found by cutting other mandatory programs.

In addition, and in an attempt to make the required significant reductions to the deficit, and also to broaden the country’s tax base, the Task Force would supplement the spending cuts with a 6.5% "debt-reduction sales tax”.

The Task Force also proposes a significant simplification of the tax system by establishing individual tax rates of 15% and 27% (from the current high of 35%); cutting the corporate tax rate to 27% (from the current 35%); ending most deductions and credits while simplifying the rest; and ensuring that, by 2018, nearly 90m households no longer have to file returns.

As Domenici and Rivlin have already written, in an article in the Washington Post, getting their retaliation in first, “many on the left and right will attack pieces of our plan, just as they attacked the recent proposal from the co-chairs of President Obama's fiscal commission. Indeed, some members of our group question elements of our proposal while supporting the comprehensive package as a whole.”

It can be expected that the proposed federal sales tax, in particular, will receive little support, having previously been rejected across the political spectrum. However, as Domenici and Rivlin say, “the status quo is not an option.”

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