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Greenspan wants consumption and income tax { March 4 2005 }

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New consumption tax could spark economy, Greenspan suggests
By Associated Press | March 4, 2005

WASHINGTON -- Federal Reserve chairman Alan Greenspan said yesterday that a new consumption tax -- such as a national sales tax -- could spark the economy as a partial replacement for income taxes.

Greenspan cautioned that there would be political and administrative difficulties in moving toward a new national tax system.

Simplification is needed, perhaps a hybrid between consumption taxes and income taxes, he told the President's Advisory Panel on Federal Tax Reform.

''In other words, don't try for purity," Greenspan responded to a question from a panelist.

Democrats raised alarm about potentially crippling taxes on food and medicine when the possibility of a national sales tax came up during the presidential election.

The panel's vice chairman, former Senator John Breaux, Democrat of Louisiana, said it was important that the Fed chief said income and consumption taxes could work together.

''He said you could do both," Breaux said. ''I don't think he endorsed it, but his saying that it can work, like many other countries have done, I think was a very significant statement."

Bush's advisers have spoken favorably of the economic benefits that could be achieved by moving from a system that taxes income to one that taxes consumption.

Addressing concerns about increased taxes on necessities like food, Greenspan said policy makers could design a consumption tax that would exclude products mostly consumed by the poor.

A consumption tax could take several forms, such a national sales tax or a value-added tax, used by some European countries. Value-added taxes are imposed on the increased value of a good or service at each stage of manufacture and distribution and ultimately passed on to the consumer.

Consumption taxes are one of many options under consideration by the president's tax panel, charged with studying tax laws and offering several blueprints this summer to make taxes fairer, simpler, and less burdensome on the economy.

Greenspan said economists believe a consumption tax would best promote investment and growth. ''However, getting from the current tax system to a consumption tax raises a challenging set of transition issues," he said.

Copyright 2005 The New York Times Company

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