A tax expert who worked in the U.S. Treasury Department during the Reagan era is warning against the perils of shifting to a “consumption-based” approach to taxation.[@@]
The expert, Leonard Burman, a senior fellow at the Urban Institute, Washington, spoke Wednesday at a House Ways and Means Committee hearing on tax reform.
Some Republican tax theorists have argued that the federal government could simplify the federal tax system and increase its fairness by moving to tax consumption rather than income.
The current tax system is unfair, and “it imposes vastly different tax burdens on people with similar abilities to pay,” Burman told lawmakers, according to a written version of his testimony.
But Burman said shifting to a consumption-based tax system would be impractical, could end up increasing the burden on low-income and moderate-income workers, and efforts to protect the poor could lead to even greater pressure on moderate-income workers.
Some researchers have predicted that taxing consumption, rather than income, would increase the U.S. retirement savings rate, but Burman said he believes the shift could cut the retirement savings rate.
A shift to a consumption-based tax system would hurt retirees’ purchasing power, and a transition system set up to help retirees would increase the pain for workers, Burman said.
“Perhaps most surprising,” Burman said, “in the real world, shifting from an income to a consumption tax would not necessarily increase saving, at least not for middle-income families.”
Today, employees have an incentive to contribute to 401(k) plans because the plans reduce income taxes, Burman said.
“Under a consumption tax, all saving is exempt from tax so there is nothing special about pensions,” Burman said. “Without the inducement of a subsidy, many workers would choose to keep all of their savings in less restrictive accounts.”
Even if workers put retirement money in less restrictive accounts, they would be more likely to take the money out before retiring, Burman predicted.
Links to the written versions of Burman’s testimony and the remarks made by other hearing witnesses are on the Web at http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=417