Newspaper article THE JOURNAL RECORD

National Sales Tax Raised in Deficit Debate

Newspaper article THE JOURNAL RECORD

National Sales Tax Raised in Deficit Debate

Article excerpt

Get ready for the debate over a national sales tax.

The first rumblings already can be heard. While there's little likelihood that such a tax would be enacted this year, some astute political and economic thinkers predict that it won't be long before such a tax comes into being, either in the form of a value-added tax or a consumption tax.

President Bush was elected largely because of his pledge against new taxes. But the federal deficit and national debt are not fading. Even the most optimistic forecasts expect little improvement under the current system. It's estimated that a 5-percent federal sales tax, even with exemptions for some kinds of purchases such as food and medicine, would raise $60 billion annually.

``I can foresee a consumption tax,'' says former Commerce Secretary Peter Peterson. This would amount to a national sales tax, and such a levy has much to recommend it.

``I think there's a strong argument for taxing consumption in a country that has a 2 percent national saving rate,'' says Dr. Lawrence Summers, a professor of economics at Harvard. Despite recent figures indicating a brief increase in savings, the U.S. savings rate is on average the lowest in the developed world.

Because a consumption tax would apply only to money that is spent, simple savings and investments would become tax shelters. This would make money available for new enterprises or to strengthen old ones, and the overall economy would profit.

It seems a perfect system, but there are powerful arguments against it.

``The problem is, it's a regressive tax,'' says Summers. This means that it applies equally to rich and poor - not like the ``progressive'' income tax, which applies higher rates to higher incomes. The poor and those on fixed incomes, and especially those who have saved for retirement and are now living on their savings, would bear a heavy burden. Those living on their savings would feel the burden of being taxed twice: Once when they earn the money they have saved, and again when they spend it.

Fortunately, there is at least some potential for relief.

Tax credits could be offered for the poor and those who would otherwise be unfairly treated, said Summers.

One way a consumption tax could be made to seem more equitable would be through ``luxury taxes'' on expensive automobiles, homes costing more than a certain amount, yachts and the like.

Such a system probably would be phased in over a period of years, beginning in all likelihood with tobacco products, liquor, and gasoline.

Long ago, officials discovered that these items can be heavily taxed without having much effect on their use. …

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