WASHINGTON – Basing the government’s tax system on consumption rather than income is not as radical a change as it seems, President Bush’s chief economic adviser said Thursday.
Bush’s goals are tax laws that are simple, fair, promote growth and create jobs, said N. Gregory Mankiw, chairman of the president’s Council of Economic Advisers.
Bush has said he will make overhauling those laws a priority in his second term and will appoint a commission to make recommendations.
Mankiw, reviewing some of the options Bush will consider, said many economists believe that tax laws discourage saving and investment, and that changing that could free up money for business investment.
Under a consumption tax, Mankiw said, “The result would be greater saving, increased capital accumulation and higher growth in productivity and wages.”
Mankiw did not mention what type of consumption tax might be considered. Some Republicans in Congress have advanced ideas such as a national sales tax or a value added tax, which is prevalent in Europe. That is, in effect, a sales tax imposed at each level of production of goods and services.
Mankiw said it was wrong to believe that a switch to a system that taxes what Americans spend rather than what they earn would amount to a radical change.
“The current tax code, while nominally an income tax, is actually a hybrid of an income tax and a consumption tax,” Mankiw said at a tax conference sponsored by the American Enterprise Institute, a Washington, D.C., think tank.
He said efforts by Congress to promote savings by allowing Individual Retirement Accounts and 401(k) plans have the effect of exempting savings from taxation and thus moving the tax base away from income toward consumption.
He said the 2003 legislation that lowered taxes on corporate dividends and capital gains had the same impact.
In the effort to make tax laws simpler, Mankiw mentioned the need to amend the alternative minimum tax. This tax was intended to ensure that the wealthy paid their fair share of taxes, but it is beginning to ensnare middle-income taxpayers.
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