Although President Bush's tax reform advisory group recommended against shifting the U.S. to a European-style value added tax or a national sales tax system, congressional advocates of consumption taxes haven't given up the fight.
The latest proposal to surface is an innovative "transaction tax" advanced by Rep. Chaka Fattah during hearings of the House Ways and Means Committee.
Under his plan, all federal taxes -- including taxes on personal and corporate income, payrolls, capital gains, dividends, estates and gifts -- would be abolished and replaced by a single "transaction fee" on all payments (cash, check or credit card) processed through the Federal Reserve System.
Because this fee would be applied to a huge taxable base (estimated at $73.4 trillion annually by the Congressional Research Service), Fattah testified that the tax rate imposed under his approach would be far lower than other consumption taxes.
The President's Advisory Panel on Tax Reform estimated that in order to replace the revenues currently generated by federal income taxes, a "modified VAT" would have to be set at 5 percent to 15 percent, while a national sales tax would need a rate of 22 percent to 34 percent.
In contrast, Fattah told Congress, "The transaction fee could produce the same amount of revenue at a rate of about 0.4 percent." The current legislation is based on a system developed by University of Wisconsin economics professor Edgar L. Feige. His plan, known as an Automated Payment Transaction Tax, would go even further than Fattah's proposal by also eliminating state and local income and sales taxes, as well as most property taxes.
Advocates of Feige's APT Tax say the effectiveness of this approach rests with its ability to expand the tax base to include segments that currently escape taxation, including all security and derivative transactions, all foreign exchange transactions involving the U.S. dollar, illegal transactions in cash, transactions of companies losing money, and transactions involving transfers between accounts.
For his House bill, Rep. Fattah tweaked Feige's APT plan to exclude transaction taxes on wages or on cash transactions involving less than $500. In calling on Congress to support this approach, Fattah said that his legislation would not only streamline the tax code, but also "provide a mechanism to eliminate the national debt."
