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Panel is warned on overhauling income tax

NEW ORLEANS -- A poorly designed overhaul of the tax system to make the current income tax more like a consumption tax would be ''the worst of all worlds," specialists told a presidential commission yesterday.

Bob Greenstein, founder and executive director of the Center on Budget and Policy Priorities, told the President's Advisory Panel on Federal Tax Reform not to add consumption tax features, such as large, tax-free savings accounts, to the income tax.

''That approach, I think, is the worst of all worlds," he said. ''It's sort of a 'what not to do.' "

William Beach, director of the data analysis center at the Heritage Foundation, agreed. ''The motto is, tax all income once and at its source," he said.

The panel, formed by the president to recommend ways to make taxes simpler and fairer, reports its findings this summer. It has been studying changes to the income tax as well as the possibility of adding a consumption tax, such as a national sales tax or a European-style value-added tax.

Alan Greenspan, chairman of the Federal Reserve, has told the panel that some form of consumption tax could spur greater economic growth, but he cautioned that the government would face significant problems making the transition to such a system.

The panel's vice chairman, John Breaux, a former Democratic senator from Louisiana, has said a hybrid between taxes on income and taxes on spending has merit and should be studied carefully.

Greenstein warned that one of the biggest advantages of a consumption tax -- its potential to spur economic growth -- would be lost in a poorly redesigned income tax. Such a change would be costly for the government.

Adding significant incentives for tax-free savings also would put more pressure on families that earn income through work and earn little from investments, and ''you end up with a wage tax," he said.

John Kennedy, Louisiana's treasurer, said the panel should keep in mind that his state, and many others, already rely on sales taxes for part of their tax revenue.

''Adding a sales tax at the federal level on top of this will impact both business and consumers," he said. ''That's just a fact."

The tax specialists were summoned to offer their thoughts on fairness in tax laws and how that concept should be measured.

Breaux said the tax system has long assumed that taxes should be levied according to a person's ability to pay, and that taxes should apply consistently to people of similar means.

''There is no consensus among tax experts, politicians, or taxpayers on how to define fairness," Breaux said.

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