Tax Panel Considers Mixing Income, Consumption Taxes

President Bush's tax reform panel listened Wednesday to the pros and cons of taxing money earned or money spent, leading one member to say that a hybrid should be considered.

"It has merit," said John Breaux, a former senator from Louisiana and the panel's Democratic vice chairman.

The discussion of income taxes and consumption taxes (search) launched the panel's exploration of ways to make taxes fairer and simpler. The president's tax reform advisory panel must make recommendations this summer, perhaps too late for any revisions to be enacted this year.

Treasury Secretary John Snow (search), nevertheless, promised an enthusiastic push reform, to something more than just moving the boxes around," he said.

Former IRS Commissioner Fred Goldberg Jr. told the nine-member panel that a "perfect storm" looms over the current tax system, driving it toward crisis.

The storm is fed by changes enacted in the president's first term -- which will disappear by 2011 -- and the burden of a growing alternative minimum tax, a levy now affecting more of the middle class than ever intended.

The system also feels pressure from growing deficits and increasing benefit payments for an aging society that depends on Social Security (search) and Medicare (search).

"You are better off thinking big than thinking little," Goldberg told the panel.

The current tax system rests mostly on income taxes, but has tendencies toward a consumption tax system, said Harvard law and economics professor Louis Kaplow.

The Bush administration's tax cuts for capital gains and dividends moved toward a consumption tax, and the president's proposals to expand tax-free savings accounts would go further.

Consumption taxes can, alternatively, take the form of national retail sales taxes or a value-added tax, imposed on the increased value of a good or service at each stage of manufacture and distribution and ultimately passed on to the consumer.

A consumption tax sounds better in theory than it works in practice and may not preserve the progressive system that taxes lower-income individuals less than wealthier people, argued William Gale, co-director of the Urban-Brookings Tax Policy Center (search).

"In the real world, every consumption tax ever designed has hit high-income people less than our existing income tax systems do," he said.

Stephen Entin, president and executive director at the Institute for Research on the Economics of Taxation (search), said the current system penalizes savings and discourages investing. He argued that a consumption tax would promote economic growth.

"There would be no limits on savings plans," he said, adding that such a tax system can still be constructed in a way that shelters the poor.

Panelists also mentioned a need to re-examine dozens of tax laws, meant to help individuals and families, that add complications, such as credits and deductions for savings, school and children.

The panel meets again March 3 to examine specific problems in the current tax laws.