On Revamping the Tax Code

I would not presume to suggest the best specific path for reforming the tax system. However, past experience suggests that as the panels work gets under way, one of the first decisions that you will confront is the choice of tax base; possibilities include a comprehensive income tax, a consumption tax, or some combination of the two, as is done in many other countries. As you know, many economists believe that a consumption tax would be best from the perspective of promoting economic growthparticularly if one were designing a tax system from scratchbecause a consumption tax is likely to encourage saving and capital formation. However, getting from the current tax system to a consumption tax raises a challenging set of transition issues.

In 1986, tax reformers considered a consumption tax base and, despite the arguments in favor of such a system, they decided to enhance the comprehensiveness of the income tax system then in place. Circumstances are different today, and the right choice will require assessing anew the tradeoffs between complexity, fairness, and economic growth.

by Alan Greenspan, Federal Reserve chairman,
in a March 3 speech to a bipartisan panel convened by President Bush.