Greenspan Suggests Adoption of Hybrid Tax System

Earlier today, I discussed the reactions to Senate Minority Leader Harry Reid referring to Fed Chairman Alan Greenspan as a “hack” and noted that many of us, on both the Left and the Right, think Greenspan acts as if he’s the guru of all things Econ. Here’s a classic example:

Fed Chairman suggests adoption of hybrid tax system (newratings.com)

Federal Reserve Chairman Alan Greenspan on Thursday called for an overhaul of the US tax system, while recommending the introduction of a consumption tax to boost economic growth. President Bush has made the overhaul of the federal tax system one of his top second-term goals, while setting up an advisory panel to explore various reform options.

“As you know, 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,” Greenspan said, while speaking at a meeting with a panel appointed by President Bush to consider tax reforms. The US tax system is not a practical way of reducing the country’s current account deficit, Greenspan added. Pointing out that the switch from an income tax system to consumption tax would not be easy and may face huge opposition from the Democrats, Greenspan suggested that policymakers could try out a combination of an income tax and a consumption tax. “I would suspect that probably that may be the best route to go. In other words, don’t try for purity,” he said. Consumption tax can take the form of national retail sales tax or a value-added tax. Greenspan suggested that a consumption tax could skip such necessities as food and clothing to restrict its negative impact on the poor.

I tend to think Greenspan is right, for what that’s worth, but what has this to do with managing the Federal Reserve system?

FILED UNDER: General
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Kappiy says:

    “Pointing out that the switch from an income tax system to consumption tax would not be easy and may face huge opposition from the Democrats,”

    I would think that Republicans would also oppose a consumption tax since such a scheme would go against their long-standing opposition to tax increases. In fact, groups such as Heritage were among those who criticized plans like value-added taxes that Clinton floated during the early 90s.

    It is true that Hastert wrote about increasing taxes using a VAT in his recent book–but the effect that a 24% tax (which is Hastert’s plan) would have on prices and most people’s pocketbook would make such a scheme meet so much bipartisan resistance, I doubt it would go anywhere.

  2. Kyra Richards says:

    A consumption tax sounds like a nifty idea, but the simple truth is that such a tax over-taxes the poor and under-taxes the rich.

    If you are living paycheck to paycheck, what percentage of your income do you end up spending? Pretty close to 100% (or more by getting into debt). That means 100% of your income gets taxed.

    If you are wealthy, sure, you spend a lot, but what percentage of your income do you spend? 50%? 20%? The rest you are free to put into savings or whatever, tax free.

    Greenspan may need to keep his mind on running the Fed and leave taxes to those who think the issue through.

  3. ATM says:

    So swap the payroll taxes for consumption taxes.

  4. John Kee says:

    A hybrid is the most dangerous scenario. Once the door is open both taxes will rise. Taxed when earned and taxed when spent.

  5. I agree with Kee. I will fight this tooth and nail since what will happen is that they will only TEMPORARIALLY lower income taxes to add a sales tax. In 10 years the income taxes will be raised back to where they are today. So we would have the same rates as today with the addition of a national sales (added to most states sales tax).

    No thanks.

  6. Clyde Kahrl says:

    Most evidence shows that contrary to communist thinking in the early twentieth century, the rich spend all of their money, just like the poor do–it just takes longer–maybe a generation or three.
    Anyway, the consumption tax idea would solve most of the income tax tinkering ideas by reclassifying all income as equal. It would also allow the middle class to shelter their income just like the rich and it would essentially allow IRA-type treatment for all savings, thereby eliminating the need for complex IRA accounting. (Roth IRAs have the potential to last over 100 years per account.)

    Greenspan has a responsibility to speak on these issues because the money supply and the value of the dollar are inextricably tied-up in taxation and capital formation.

  7. Dave Schuler says:

    All the money are belong to him.

  8. Richard Johnston says:

    Just like Greenspan.A blanket tax on the total income of the poor and many in the middle class. His policies have been a disaster and will leave the U.S. (future generations) saddled with enormous government debt and a flood of personal bankruptcies, people who cannot handle the massive credit card debts the low wage policies have imposed on working people by a Congress that automatically raises its own salary periodically.

  9. tony says:

    This consumption tax sounds a lot like Canada’s Goods and Services Tax or Europe’s Value Added Tax.