National Sales Tax Gains Favor

To most in Washington, D.C., Social Security (search) reform is a huge undertaking, but for some in Congress, it's not a big enough challenge. They want to add tax reform to the mix.

One idea that's getting the most attention is a national sales tax, not just from President Bush's tax reform panel but from the chairman of the Federal Reserve Board.

Chairman Alan Greenspan's recent appearance before the tax reform panel gave the national sales tax new political life.

"A consumption tax (search) 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," Greenspan said.

A national sales tax (search) would work the same way state sales taxes do — added at the point of purchase. Supporters want it to replace the federal income tax and the payroll tax that finance Social Security and Medicare (search).

"People are afraid, not only for their inconvenience on April 15, but will their jobs be here in the future, and I think that's what's changed the debate. It's now a jobs issue," said Republican South Carolina Sen. Jim DeMint.

The president's tax reform panel heeded Greenspan's comments and is seriously analyzing the sales tax option.

"We can make the best possible recommendation from a tax perspective and it may be that we do more in the consideration of taxes on consumption," said former Sen. John Breaux, vice chairman of the President's Advisory Panel on Federal Tax Reform.

But sales tax advocates want their tax to replace income and payroll taxes

"We need to throw out the current income tax system, look at various types of consumption tax, so people can see how much they're paying rather than all the disguised taxes we have today," DeMint said.

Breaux, however, said it would be nearly impossible to write a tax code from scratch, oblivious to political obstacles and history.

"The fact is we cannot start from scratch because we have a long history since 1913 of having a federal income tax in this country," he said.

House Ways and Means Committee Chairman Bill Thomas, R-Calif., the key player in the House on tax policy and Social Security reform, has said a national sales tax might fit into an overall fix for Social Security. Thomas is looking for revenue to extend Social Security's solvency and finance private accounts. Creating a new sales tax and merging it with the income tax might solve the revenue problem

But the president's tax panel says combining tax reform and Social Security reform is more than Congress can handle.

"I think Bill Thomas' ideas are probably ahead of his time," Breaux said.

Click in the box near the top of the story to watch a report by FOX News' Major Garrett.