I've been a fan of this for a while, nice that Greenie agrees.
Posted on Fri, Mar. 04, 2005
Greenspan talks up tax on spending
Tells Congress it would help economy grow
By Joel Havemann
Los Angeles Times
WASHINGTON – Federal Reserve Chairman Alan Greenspan on Thursday nudged President Bush’s tax overhaul panel in the direction of relying more on taxing personal consumption and less on taxing income, saying it would encourage people to save and invest more of the money they earn.
He argued that the money saved would create assets that could then be used for investment in the nation’s economy.
“Many economists believe that a consumption tax would be best from the perspective of promoting economic growth, particularly if one were designing a tax system from scratch, because a consumption tax is likely to encourage saving and capital formation,” he told the panel.
Greenspan did not propose throwing out the income tax in favor of a sales tax, nor did he oppose it. But he seemed to lean toward a mixed system, favored by many European countries, in which income and consumption are taxed.
The advantage of a consumption tax – a sales tax is one example – is that it does not tax income that is saved and invested, Greenspan said.
“I believe that, as the baby boom generation begins to retire in a few years, it will become increasingly important for the nation to boost resources available” by promoting savings and promoting participation in the labor force, he said. “The tax system has the potential to contribute importantly to those goals, and, at a minimum, tax reform should not hinder the achievement of those objectives.”
Greenspan was the leadoff witness during the second hearing of the President’s Advisory Panel on Federal Tax Reform. President Bush has said that simplifying the tax code is his No. 2 domestic priority after Social Security overhaul.
Bush has given his advisory panel until July 31 to offer multiple options to Treasury Secretary John Snow, and the president has given Snow until the end of the year to send a recommendation.
After Greenspan was James Baker, who was President Reagan’s Treasury secretary in 1986, when Congress last simplified the tax code. The 1986 revisions, Baker said, reduced the number of tax brackets from 14 to two, eliminated scores of tax breaks and slashed the top personal tax rate from 50 percent to 28 percent.
“Regrettably,” Baker said via closed-circuit television from his office at Rice University in Houston, “this sweeping reform proved transitory, as subsequent decades saw marginal rates raised and some deductions and loopholes restored.”
Greenspan noted with approval that the United States already was drifting toward a consumption tax by giving favorable tax treatment to money saved, as opposed to money spent. Capital gains and dividends, for example, are taxed at a maximum rate of 15 percent.
Responding to Democrats’ assertions that a consumption tax would more severely affect poorer people, because a larger share of their income goes for such items as food, clothing and medication, Greenspan suggested that certain items “disproportionately consumed in the lower brackets” could be excluded from taxation, although he offered no specifics.
In most states with a sales tax, food items and prescription drugs are exempt.