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Greenspan: Simpler Tax Code Could Boost Growth
By Nell Henderson
Washington Post Staff Writer
Thursday, March 3, 2005; 2:14 PM
Federal Reserve Chairman Alan Greenspan said today that the U.S. tax code should be simplified in ways that would boost economic growth.
Greenspan, addressing President Bush's advisory panel on tax reform, urged the group to follow the spirit of the "exemplary" 1986 law that lowered marginal rates while broadening the revenue base by scrapping the myriad provisions that shield many types of income from taxation, such as various exemptions, deductions and credits.
Since 1986, he said, "the tax code has drifted back to be overly complicated" with both higher rates and multiple special provisions that narrow the tax base. "It is perhaps inevitable that, every couple of decades, drift needs to be addressed and reversed."
Greenspan offered no specific tax law changes, but he recommended broadly that the panel seek to keep tax rates as low as possible and make the rules predictable. That, he said, should benefit the economy overall, as did the 1986 law.
"A simpler tax code would reduce the considerable resources devoted to complying with the current tax laws, and the freed-up resources could be used for more productive purposes," the Fed chairman said.
Bush created the advisory panel to recommend ways to simplify the tax code to promote long-run economic growth and job creation, while encouraging work, saving and investment. He has directed the group to maintain the tax deductions for home mortgage interest and charitable giving.
The president has made tax reform one of the top domestic legislative priorities of his second term, along with restructuring Social Security.
Greenspan said in his testimony that one of the first decisions the panel must confront is the choice of tax base, whether to focus on taxing consumption spending or on income, or some combination.
The U.S. system is "somewhat mixed," as are those of many countries, he said, adding "that is probably the best route to go."
Many economists, including some White House advisers, have advocated moving to a system that would tax spending more heavily, such as through a national sales tax or value-added tax, arguing that it would better encourage economic growth.
Greenspan noted that argument, but he didn't say whether he agrees. Rather, he suggested switching to such a system may be impractical because of "a challenging set of transition issues." And, he added, "the opposition that would arise would probably make [a pure consumption tax] infeasible."
More generally, Greenspan repeated his oft-stated belief that taxes should be held as low as possible.
"Any tax increase, as you know, inhibits economic activity in one way or another," he said. "Whatever you tax, you will get less of."
However, he criticized the proliferation of the many special provisions that reduce taxes in various ways. One problem, he said, is that they distort economic behavior by prodding businesses and consumers to make decisions based on tax advantages rather than pure economics.
The special provisions also make the tax code more unpredictable, he said. Ever changing rules make forecasts more uncertain, lowering investment and restraining the rise in living standards, in Greenspan's view.
He did, however, endorse tax breaks designed to encourage retirement savings, such as through 401(k) and IRA accounts, calling them "something we ought to pursue."
Economists disagree about whether the accounts really lead to more savings overall or rather just cause people to move their savings from regular accounts to those that carry tax advantages. Either way, Greenspan said it is "probably indisputable" that they do boost saving for retirement specifically, even if there is no net increase in total saving.
And boosting saving for retirement, he said, is "clearly something that is desirable."
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