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“Tax panel listens to options”
VAT, national sales tax, flat tax get hearing
WASHINGTON (MarketWatch) -- The federal advisory panel tasked with coming up with ways to overhaul the U.S. tax code has already heard the current system is a mess.
On Wednesday, they heard from a range of tax experts and advocates on what to do about it.
On tap were detailed lectures on how a range of alternatives -- from a value-added tax to a national sales tax to a flat tax -- could be used to largely supplant the existing income tax regime.
Yale Law School professor Michael Graetz defended his proposal for a national value-added tax, or Vat tax, which would largely replace the federal income tax. A value-added tax is a form of consumption tax, and is levied at various stages of the manufacturing process, which makes it more difficult to evade.
Graetz has advocated a plan that would set a VAT of around 13% to 14% on manufactured goods. It would eliminate the income tax on individuals making less than $50,000 a year and couples earning less than $100,000. Earnings above that level would be subject to a flat 25% tax.
Such a plan would reduce U.S. income taxes as a percentage of the economy to a level more in line with the rest of the world, while raising consumption-related revenue. By maintaining an income tax on higher incomes, the distribution of the tax burden would remain largely the same, Graetz argued, while savings would also be encouraged.
Critics contend that governments are tempted to hike Vats because they often serve as an opaque "money machine" that throws off big revenues while masking the tax burden.
"The criticism we've heard is that [the Vat tax] is such an easy tax to increase," noted former Democratic Sen. John Breaux, the vice chairman of President Bush's Advisory Panel on Federal Tax Reform.
Graetz said such worries underline the importance of moving to a VAT in one fell swoop, and using the revenues to replace much of the income tax revenue collected by the current system.
"Obviously if you took a VAT and added it on for this or that, my view is that you would have a 14 to 15% rate before long and you wouldn't have paid for simplification" of the tax code, he warned.
Later, backers of a national sales tax received a lukewarm reception from the advisory panel.
Thomas Wright, executive director of Americans for Fair Taxation, a group that has advocated replacing federal income, payroll and estate taxes with a 23% national sales tax, told the panel that grassroots support for their proposed "Fair Tax" is on the rise.
Former Republican Sen. Connie Mack, the tax panel's chairman, said he found the proposal "very intriguing," but asked "if this is such a great idea, why haven't other political entities around the world pursued it?"
Mack then posited that a sales tax may be "unique" to the U.S. Tax system, where a number of states already have in place a sales tax.
Wright argued that "two of the largest economies in the world use sales taxes -- Texas and Florida."
Breaux noted that critics have derided claims that a 23% tax rate would sufficiently replace revenues. The National Retail Federation, citing Joint Committee on Taxation calculations, contends it would take a 57% retail sales tax to offset lost revenues, assuming no exemptions for any particular goods or services. The trade group opposes a shift to a consumption tax.
Wright said there were academic studies that backed up the group's claim that a 23% rate would be sufficient.
Wright and Graetz were among 27 witnesses scheduled to appear before the panel in a two-day hearing that concludes Thursday. The panel was also scheduled to hear from former House Majority Leader Dick Armey, R-Texas, a longtime advocate of replacing the income tax code with a "flat tax." John Podesta, CEO of the Center for American Progress, a liberal think tank, testified on measures to reform the existing tax code, including treating dividends and capital gains as regular income.
The panel must report back to the Treasury Department this summer with specific tax reform proposals. Bush has ordered that the proposals simplify the tax code but remain revenue-neutral.
William L. Watts is a reporter for MarketWatch.