Friedman: Consumption tax best, but unlikely
Source: By William L. Watts
Bush appointed the panel earlier this year, charging it to come up with a range of proposals to simplify the federal tax code. Bush has said any final plan must maintain deductions for mortgage interest and charitable giving, and must also be revenue-neutral.
Those parameters make it unlikely the panel will come up with proposals to uproot the current tax code. The panel's vice chairman, former Democratic Sen. John Breaux of Louisiana, had previously indicated he would be open to some kind of hybrid tax system that incorporates elements of some form of consumption tax into a less complicated version of the current income tax.
Bush tapped Breaux and former Sen. Connie Mack, R-Fla., to head the tax panel, which is scheduled to report back to Treasury Secretary John Snow by July 31.
The panel also heard from semiconductor giant Intel Corp. (INTC) President Paul S. Otellini, who argued for permanent extension of the research and development tax credit - long a top priority of the technology industry.
Otellini also said that it costs around $1 billion more to build a semiconductor plant in the United States rather than overseas, citing a wide array of incentives offered by China, Israel and other countries.
Otellini said taxes are the biggest factor, along with capital grants and other local incentives offered by foreign governments. He called for a reduction in the corporate tax rate, as well as a measure to let companies fully expense factories within one year, and an investment tax credit.
Friedman, in his testimony, said a move to a pure flat tax would be nearly impossible given political realities. A seat on the tax-writing House Ways and Means Committee, for example, is a plum assignment because it gives a lawmaker ample opportunity to dole out favors to donors, he said.
The last major tax code overhaul in 1986 came about only because the "numbers in the tax code had gotten so complicated, you had filled up the blackboard ... so that congressmen had nothing more to sell" and were "therefore willing to wipe the slate clean and start over again," Friedman said.
"Maybe it's time again for another wiping the slate clean," he said.
Efforts to move to a consumption tax would be complicated by concerns over the impact on lower-income workers, who spend a larger portion of their income on housing, food, clothing and other necessities. Democrats contend some forms of consumption tax would amount to a regressive form of taxation.
Proponents of a consumption tax argue that credits or other measures could be used to maintain progressivity, shielding lower income taxpayers from a higher tax burden.