GOP tax plan has "potential": National sales tax would replace income tax

By William Neikirk
Chicago Tribune

Rep. Dennis Hastert backs the tax change.

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WASHINGTON — A once-quiet campaign by several top Republicans to abolish the Internal Revenue Service and replace the federal income tax with a European-style national sales tax has burst into the open, leading President Bush to withhold his blessing of the controversial proposal.

Yet the plan has strong backing within the GOP hierarchy, including House Speaker Dennis Hastert of Illinois, who has become its most visible advocate and said he has plans to push the idea strongly in the next Congress.

The speaker said in an interview that if Bush is re-elected and the GOP keeps control of the House and Senate, there is a "potential" Congress could adopt the plan during the next four years. "I think we ought to have a national debate on this," Hastert said.

"We have the opportunity if Bush wins and we hold the House of Representatives to really make a change to do this," he said. "I think we may have one chance in a generation."

The speaker said he had talked to Bush about his proposal some time ago, "but I don't think he wanted to get this tied into the campaign." Indeed, a plan to abolish the IRS in favor of a national sales tax would have to overcome enormous opposition to become law, and most analysts believe it is unlikely.

Yet with congressional forces leading the charge, a strange debate has emerged about an idea that had, until last week, lurked in Republican shadows for months. Hastert and House Majority Leader Tom DeLay, R-Texas, had spoken in favor of the proposal, while the White House kept its counsel. Others in the GOP on Capitol Hill favor a so-called flat tax, or a single rate for all taxpayers.

Asked about the national sales tax on the campaign trail, the president last week said the idea is worth exploring, although he stopped short of supporting it. Not long after, the Democratic presidential nominee, Sen. John Kerry, attacked Bush for a tax proposal he said would increase taxes on middle-income Americans.

The White House then backed away, and Bush said on CNN's "Larry King Live" Thursday night that he is interested chiefly in tax simplification.

Still, the proposal is widely admired within GOP ranks. Several conservative supporters of tax reform said a national sales tax, or a valued-added tax (VAT), as it is formally known, would be the ultimate goal of overhauling the tax system so it taxes consumption of goods and services more than savings.

The flat tax, replacing the progressive system that assesses higher tax rates on those with higher incomes, also is under quiet GOP discussion. Sen. Sam Brownback, R-Kan., said Americans will hear Bush "talk about a flat tax, really getting the tax code out of so much impact over people's lives."
 
Bush so far has not talked publicly about the flat tax, either, but the Republican National Convention in New York will give him an opportunity to lay out a second-term agenda. A Treasury Department official said the agency has no studies under way on replacing the income-tax system with a national sales tax or a flat tax.

Hastert ridiculed Kerry's remarks about the VAT and said the plan actually would benefit the middle class. Now, he said, middle-income people pay an "imputed" tax on every product they buy because corporate income taxes simply have been passed through to them.

The speaker said a value-added tax, under which a levy is imposed on a product or service at each stage of production, could be written in such a way that low-income people don't have to pay any more than they pay now.

A VAT has the reputation of being more efficient than the income tax in collecting money. But many critics said it could lead to inflationary add-ons to the price of goods.

Hastert said U.S. companies are at a tax disadvantage compared with European firms in particular. The prices of U.S. exports contain all the American taxes, he said, while Europeans excuse the VAT on exports.

The speaker added that the tax would help end outsourcing of jobs.

Critics see it differently. Leonard Burman, an Urban Institute analyst and former tax official in the Clinton administration's Treasury Department, said both a sales tax and a flat tax would shift much of the tax burden to middle-income and low-income Americans. He said neither idea has much chance of winning the support of the American people or passing Congress.

Bruce Bartlett, a conservative economist who served in the Reagan and first Bush administrations, said that the huge federal deficit would frustrate any GOP efforts to change the tax system. He said he would be "flabbergasted" if the president supported any major change in the tax system.