Who shoulders the burden in society

Congress and the administration should remember our current tax structure’s virtues.

Last week, during testimony before a White House advisory panel on tax reform, Federal Reserve Chairman Alan Greenspan lent his qualified support for a federal consumption tax. Greenspan suggested gradually moving away from the current income-based structure by promoting tax-free savings accounts that shield income from taxation.

Interest in a consumption tax – either directly with a national sales tax or indirectly through tax-free accounts – is driven in part by growing concern for the nation’s dismally low savings rate. There is a consensus that shifting the tax burden from income to spending would promote individual saving and bolster our long-term economic outlook.

Economic efficiency is certainly a worthy objective, but Congress and the Bush administration would be wise to keep equity in mind too as they consider revamping the tax code.

A serious congressional effort to reform the tax code is long overdue. The last major initiative was in 1986, when Congress broadened the tax base and lowered rates – policies many economists believe helped spur economic growth. Since then, new exemptions and deductions have made the tax code increasingly complex.There is merit in simplifying the code, as President George W. Bush has promised. There is also ample reason to give people tax incentives to save for the future. But taxing consumption is a step in the wrong direction.

A national sales tax would fall most heavily on the poor while effectively lowering the tax rate for the wealthy. That might squeeze a few more percentage points of growth from the economy, but it would hit low-income workers hardest and place a greater share of the tax burden on the middle and lower classes.

That point might get lost in the political shuffle without a discussion about the kind of country we want. One option is marginally higher rates of economic growth and an expanding gap between the rich and poor. The other involves a conscious effort to improve the lot of the poorest individuals, even at the expense of future economic growth.Using tax-free personal accounts to promote individual savings is worth pursuing – but so is a tax code that does not harm lower-income persons. Any tax reform Congress passes must reconcile these two objectives.