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A new twist to your tax bill?

By David R. FrancisStaff writer of The Christian Science Monitor / November 15, 2004

A political cartoon shows Uncle Sam heading down a path marked "General sales tax." He's trying to move forward. But holding him by the coattails is a bearded character labeled "Congress."

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That cartoon dates from 1933 but it could easily run today. Fresh from his election victory and saying he wants "a simpler, fairer pro-growth [tax] system," President Bush is considering whether to offer the most sweeping tax-reform package since 1986. Some conservatives are urging him to shutter the Internal Revenue Service and replace today's income tax with a national sales tax collected by states. Or, he might accomplish some of the same thing - taxing consumption instead of income - with a value added tax.

He could also opt for more incremental reform, moving the nation toward one type of flat-tax system where everybody pays the same rate.

But the tax system reaches into so many nooks and niches of life that obstacles to reform loom large. If the income tax disappears, what happens to those tax-advantaged IRA and 401(k) accounts, municipal bonds, and state income-tax systems based on the federal system? Will Congress follow the president if retirees, mayors, and governors scream "betrayal?"

"It would be the end of Republican control of Congress," says Robert McIntyre, director of Citizens for Tax Justice, a liberal tax research group.

So far, Mr. Bush hasn't specified what he wants, leaving reform recommendations up to a special commission he'll appoint by year end. Tax experts will be watching for clues to his intentions from the names of those he appoints to the advisory group.

One idea the commission is likely to consider is a national sales tax. Bush last summer called it "an interesting idea that we ought to explore seriously." The House Republican leadership supports substituting a sales tax for the federal tax system. The switch would essentially make interest, dividends, profits, and capital gains tax-free.

"This is the brightest of times," says Tom Wright, executive director of Americans for Fair Taxation. "The opportunity has never been better."

At this Houston-based group, Mr. Wright has spent 14 years and $22 million in research urging that the sales tax replace all current federal taxes - payroll taxes as well as income taxes. Collection would be done by the states, which already have systems to reap state sales taxes. The Internal Revenue Service would become redundant.

A bill that would switch federal taxation to a national sales tax (H.R. 25) has 57 cosponsors in the House, he notes. "In any stand-up fight in the grass roots, we always win," he says.

Yet most observers doubt it could pass Congress. It would engender "intense public opposition and questionable economic benefits," holds David Malpass, chief economist of Bear Stearns, a Wall Street investment firm.

Opposition is already building. In September, the Democratic staff of the tax-writing House Committee on Ways and Means issued a report attacking the "radical restructuring plan."

Critics charge that a national sales tax would be regressive, placing more of the tax burden on the middle class and shrinking it for the rich. Mr. McIntyre estimates it would saddle middle-and low-income families with average tax increases of $3,000 to $4,000 a year.

But Mr. Wright counters that his plan includes a rebate system, which in effect allows each household tax-free spending up to the poverty level. Above that, families would be taxed on how much they consume in goods and services, including almost everything except education expenses, contributions and dues to charitable groups, and used goods.

Only big spenders would pay the maximum 23 percent rate, he says.