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A new tax direction.

Taxes are taking an ever larger bite out of the U.S. economy. Is it time to rethink the fundamental approach of revenue raising rather than continue to tinker with specific proposals? CEOs debate the issue with Sen. John Danforth and other tax experts.

A low-saving, slower-growth economy, some roundtable participants argue, would benefit from taxing consumption instead of income. Others worry that a value-added tax approach would give government a more effective vacuum with which to suck funds from the private economy. Besides, whatever the benefits, Washington is unlikely to tax consumption rather than income because of its concerns about political egalitarianism.

Yet the case against the American tax system is stunningly easy to make. According to Ernest S. Christian, a Patton Boggs & Blow tax partner who frequently testifies before Congressional tax committees:

* The burden imposed on society by the present tax system is easily 165 percent of taxes collected for public use. The figure may be as high as 200 percent.

* If it takes $2 trillion to collect $1 trillion in tax revenue in a $5 trillion economy, is it any wonder that the government is in gridlock, weighed down by the deficit and a huge tax burden, half of which is a dead loss?

* A U.S. Treasury study indicates that 6 billion man-hours are consumed each year by direct record keeping for income and payroll taxes alone.

* Private-sector compliance costs for corporate income taxes are between 70 percent and 100 percent of each dollar collected.

* Estimated "sales" of the tax industry, including lawyers, accountants, lobbyists, estimators, and tax economists, were at least $300 billion in 1992--or the equivalent of the combined gross sales of GM, Exxon, and IBM.

Surely the compliance and transaction cost burdens merit strategic reform. In addition, there is the question of tax effects on productivity. The Clintonites ignore the accumulated evidence of the last 13 years and maintain that public spending, now called "investment," has spillover effects that provide far greater benefits to the economy than tax credits or lower rates offer to any individual firm. One reason cited, for example, is that investment in machinery allows more rapid diffusion of technology throughout the whole economy. But supporters of more public spending on infrastructure and education ignore how this would be financed if not ultimately by printing more money. Research by professor Charles Plosser of the University of Rochester reveals that countries with high tax rates on income and capital have the slowest growth.

It is also unclear how a massive tax increase of $283 billion--over four years--including Social Security taxes and fees will produce more jobs and more investment; since, after all, little will be spent on capital equipment to raise productivity. The largest single item in the president's proposal is a $15 billion temporary investment tax credit. "Why would anyone expect business as a whole to invest more when faced with a two-year, temporary $15 billion incentive paid for by a permanent $6 billion annual tax increase on corporate earnings?" asks Allan Meltzer, visiting scholar at the American Enterprise Institute and Carnegie Mellon economist. "Why give a permanent investment incentive to small business, but a temporary investment incentive to others?" At best, Meltzer argues, the temporary ITC will push 1995 investment into 1994 before the credit expires, but it won't increase long-term investment or raise productivity.

In the ensuing roundtable session--co-sponsored by the Washington-based Tax Foundation headed by Daniel Witt--Sen. John Danforth; former Congressman Bill Frenzel; and Murray Weidenbaum, former chairman of the Council of Economic Advisers, explore the implications of a consumption-style tax. As a substitute--not an addition to--the current system, the consensus that emerged: Such a tax would address many macroeconomic problems. Some CEOs remain unconvinced, but admit that the current system punishes capital and destroys jobs. All await with dread the shoe that has yet to drop: the tax bill from Hillary Clinton's task force for health-care reform.


Sen. John C. Danforth (R-Mo.): First, let me confess that I hope to find here a well-organized, radicalized group of executives who will accept the mission to change America's tax system in a dramatic fashion: by advocating a broad-based consumption tax. Now, there is one caveat to that rather provocative statement: This new tax must replace--not supplement--a current tax, such as the payroll tax or the corporate income tax.

Major figures in the Clinton administration, such as Treasury Secretary Lloyd Bentsen, believe in a broad-based consumption tax. Why then isn't such a tax part of the program? Part of the reason is fear. The new administration doesn't want to lose those people who oppose radical tax reform. And so, it has suggested adding to the current system instead of making a sweeping change in tax policy.

We must persuade the Clinton administration to follow its original inclination. If we have a tax bill that consists of increasing income tax rates and adding a BTU tax, followed by sin taxes on cigarettes and liquor, we are never going to get what we want--an efficient tax system that facilitates investment and growth. Except maybe we will have a consumption tax to pay for health care. This new and wonderful layer of taxation would only be desirable to those who believe there shouldn't be any limit to the amount of money the U.S. government can extract from its people's pockets.

Arnold Pollard (CE): Why do people oppose the consumption tax?

Danforth: Many people assume a consumption tax is regressive, even though it can be offset in other ways, such as implementing a refundable tax credit or replacing the payroll tax or corporate income tax. Also, there is concern that consumption taxes are money machines: Once you have a consumption tax, some maintain, you can't turn it off; the government won't know when to stop.

J.P. Donlon (CE): Do you think Washington will replace state sales taxes and rebates with a VAT?

Danforth: No, I think the sales taxes could piggyback onto a broad-based consumption tax. All states wouldn't be satisfied with the same rate. And the government probably wouldn't want to reward states with high sales tax rates.


Richard M. Kovacevich (Norwest): It seems that one of the advantages of a consumption tax is that everyone pays taxes. Right now, we lose a lot of tax income because people avoid--either legally or illegally--paying their fair share. I've heard a number of $100 billion, but I think the figure could be much more than that.

Mark A. Weinberger (Danforth aide on taxes, budget, and finance): It's hard to calculate the amount of money that's not being collected through the current tax system. But another important factor is the amount of resources wasted by the government and by businesses to enforce and comply with the tax code.

Dexter F. Baker (Air Products and Chemicals): Canada switched from a manufacturer's tax to a value-added tax, and in order to claim rebates for the taxes paid to others in the production chain, everybody had to register with the IRS. All kinds of companies and firms and individuals registered. The net result: The government picked up nearly 10 percent more revenue than it had anticipated from firms and organizations it didn't know even existed.

Daniel A. Witt (Tax Foundation): Research compiled in 1987 from 1984 tax return data was done by Arthur D. Little under contract to the Internal Revenue Service. It revealed that in 1984, it cost $35 billion for the federal government to raise $57 billion in personal and corporate income tax receipts. Obviously, that is an enormous deadweight on the economy.

Tax lawyers don't like to hear these statistics, because if we start changing things, we won't need their services anymore. A great deal of economic activity goes into the reporting requirements, the analysis, and the loophole calculations that are inherent in an income tax-based revenue system.

James Q. Riordan (Tax Foundation): You can see this clearly in an international company where you have to persuade your financial people in Europe or in Asia that they must keep their records in a certain way to allow the American parent company to comply with the law.


Richard N. Daniel (Handy & Harman): To make a dramatic change in the tax system, we have to consider its structure in the context of broader economic policy--a primary goal of which is the creation of jobs. I don't see how a consumption tax addresses this problem.

Riordan: I don't think we should expect a consumption tax to increase jobs. No tax is going to increase jobs.

However, a consumption tax will cost fewer jobs than the terrible income tax system we have now. You can't make the economy grow by adding taxes.

Baker: In addition, not having a VAT leaves U.S. manufacturers at a tremendous disadvantage in global business. Let me give you an example. In the U.S., we tax income associated with the manufacturing of products. When those products go overseas, they are taxed on a value-added basis. An automobile exported to Germany is taxed once in the U.S. and again when it goes to an international customer.

On the flip side, when a German company makes that product for export, all of the value-added taxes are relieved. Then, when the car gets here, we only have a minuscule border tax--a duty of 4 percent. No income tax is assessed. This represents a tremendous competitive advantage for the German manufacturer. If we had a value-added tax that was relieved at our border, American manufacturers would be able to participate more effectively in the world's markets

We import annually $500 billion worth of foreign manufactured products. We export about $450 billion. Think of the radical economic shift that would occur if you eliminated the income tax--or VAT equivalent--on U.S. goods as you exported them abroad and levied an equivalent tax on the foreign goods that come into this country.

H. Onno Ruding (Citicorp): I don't understand the link between the VAT and the corporate income tax. You should not mix up direct and indirect taxation. You cannot deviate too much from the other industrial countries, which all have a corporate income tax. You can argue about rates and the degree of depreciation, but you simply cannot replace the corporate income tax and still think you can compete on a level playing field.

Riordan: I think the U.S. corporate income tax is related to this discussion. It's a little different from the corporate income taxes in other countries. Our definition of the taxable base is peculiar in that we have an alternative minimum tax. In effect, we tax corporations on profits that do not represent economic income to a much greater degree than do most European countries.

In addition, we do not have any effective method of limiting or eliminating double taxation; the result is a competitive disadvantage: a corporate tax drain on all the products we make and move into the global marketplace that is not encountered by our international competitors.


Allen R. Freedman (Fortis): No matter what kind of tax we have, the philosophical issue is this: How much tax do we want to collect as a society? And what will that do to investment?

We seem to be sliding into the assumption that we will collect higher taxes with a VAT. And I'm not convinced we will.

Danforth: That's correct. The defining issue in American politics is what part of the pie is government going to take? We need to keep that burden as light as possible.

In addition, there is another issue confronting us. How will taxes be collected? The deficit is hurting the economy because it is a dis-saving, and tax policy can exacerbate that damage. We don't need tax laws that encourage consumption and penalize savings and investment.

Baker: You've all heard the old saying: "The only thing certain in life is death and taxes." I recently read a slightly different quotation: "The only difference between death and taxes is that death doesn't get worse every time Congress meets." |Laughter.~

The federal government is not providing adequate incentives for industry to do what it does best. Our current tax system is broken. We can't keep patching it. We need a new system that focuses on and encourages savings, investment, and wealth creation.

In 1981, we probably had the best capital recovery system that this country has ever seen. In the ensuing 12 or 13 years, we eroded it so that, today, the U.S. has the worst capital recovery system of any industrialized nation. Some crucial mistakes: The investment tax credit was terminated in 1986, and the government imposed a minimum tax that made it impossible for firms to recover their legitimate investment depreciation allowances.

Clinton proposes to modify the minimum tax--to permit some of the depreciation allowances to be credited on a current basis--and to make the R&D tax credit permanent. However, to provide for these things, the president wants to increase the corporate tax rate and the tax on energy, and to modify the tax on foreign investments, including the foreign tax credit.

These proposals extract a substantial amount of cash from the manufacturing sector and others. This will be the fifth time in a row the most productive side of the U.S. economy--manufacturing companies--is asked to make a "contribution" to the federal government to support its social agenda.

Jobs only can be created through new capital investment. New capital investment cannot result unless cash flow is available to invest behind each worker. At Air Products and Chemicals, we invest $200,000 to $400,000 behind each worker in a permanent job in our company.

Moreover, increasing taxes on corporations removes cash from the investment base. Clinton's proposal of an incremental investment tax credit of 18 months duration does not begin to offset the deteriorating effects of the energy tax and the corporate income tax.

For fiscal years 1980-1992; in billions of dollars

 Federal State/Local Percent
Year Government Government Total of GDP

1980 $75.0 $2.3 $77.3 2.92%
1981 87.6 2.3 89.9 3.03
1982 92.8 2.3 95.1 3.05
1983 101.1 2.3 103.4 3.12
1984 118.5 2.6 121.1 3.28
1985 125.5 3.0 128.5 3.24
1986 132.7 3.6 136.3 3.23
1987 138.0 4.4 142.4 3.20
1988 151.7 5.1 156.8 3.26
1989 159.5 5.8 165.3 3.20
1990 167.7 6.6 174.3 3.19
1991 172.5 7.4 179.9 3.19
1992e 179.9 7.7 187.6 3.20

Source: Survey of Current Business, Department of Commerce; Tax

Note: Includes business employer-paid portions of OASDHI, UI,
and other.

Industry and investment will flow to wherever they are treated best. If Singapore is more attractive than the U.S., that's where productive people and productive capital go. We are competing with other countries to retain our industrial base and to expand that base. If our tax system discourages capital formation and job creation, government is going to have to keep raising taxes until it puts business out of business.

We have to do something about health care, we have to do something about our cities, we have to modernize our infrastructure. These are all needs. But they're not going to be fulfilled by redistribution. The manufacturers of America believe we must restore a meaningful permanent incentive for new investment in plant and equipment in the U.S., but the Clinton investment tax proposals are much too short-term. By the time you make your decision, you'll have about a 12-month time frame in which to implement it, which means you can buy trucks and automobiles and maybe some inventory, machine tools, and PCs, but you won't be able to build large-scale plants that have export potential for the U.S.

In Canada, you can write off your plant and equipment over two years. Belgium has flexible depreciation, so you can choose what part to write off in that year.

Danforth: We should allow businesses to expense equipment.

Riordan: Yes. Why is it that you cannot expense a computer, but you can expense advertising or training? We're all trying to build wealth and a healthy business for the future, and it makes no sense to discriminate against buying equipment which is so often the key to productivity.

Weinberger: Senator Danforth talked about replacing certain corporate income taxes, which means expensing of equipment. Obviously, an investment tax credit means a reduction in cost of capital.

U.S. businesses recover only 30 percent of all their investment in capital in the first five years, whereas Japan's get 60 percent, Germany's 80 percent, and Korea's 90 percent. So, we're at a significant disadvantage in the cost of capital. If a consumption tax were to replace the corporate income tax, to some extent, through expensing, you would reduce our cost of capital relative to the rest of the world. That creates more jobs.

Baker: We also need to talk about research and development. We want R&D to take place in the U.S. There must be some recognition that creativity and R&D are essential components of wealth creation. At an absolute minimum, we need to make the R&D tax credit permanent and to increase the current incremental allowances. Small capital items, say, up to $5,000 or $10,000--or maybe in R&D-related equipment, the amount could be $100,000--could be expensed in the year in which their costs are incurred.

Regarding foreign income tax credit reform, we penalize American industry for investing abroad on the assumption that somehow, if it doesn't invest there, it will invest here. That's not true. The chemical industry exports 40 percent of its output into international markets through overseas affiliates. If we don't invest abroad, we can't bring in a product from our home base, reformulate it to local markets, and serve it. We need overseas companies. And we shouldn't treat them as competitive with the U.S. base. In fact, they supplement economic growth in the U.S. Those companies that invest abroad are the best exporters.

We also need to improve our personal savings incentives, because those savings go back into the investment side of American industry. Right now, there's no incentive to save. We abandoned our IRA system. Our 401(k) plans do a good job, but they aren't available to everyone. We need something more: perhaps a 401-type plan or something equivalent.

If we're inclined to adopt a VAT, in which direction should we move? I like the idea of working with the successful role models. Canada has a workable system, Europe has one, and Japan has one. We don't have to be extraordinarily creative out of the box; let's just put something together that permits us to have a consistent world trading system.

Donlon: Of the countries and continent you name, which system is the best?

Baker: I'm not sure if there is a best system, but here are my thoughts on what works and why. Japan's corporate rates are high, but it gives tremendous allowances. Germany's tax rate is on the high side because of the need to fund the acquisition of East Germany. I think Mexico is getting ahead of us in terms of the incentives it provides for investment.


Ruding: I have four arguments for the VAT. One is that most economists agree it's simply the better system--more balanced and logical. Second, it's internationally neutral. If all countries apply the VAT, you are on equal footing. Third, it is a very efficient system of collecting taxes--it takes care of the underground economy rather well. Fourth, the majority of the OECD countries already have adopted it.

I am going to make a prediction: The U.S. will adopt a value-added tax. I don't know when, but I can assure you, it will happen. When it does, the U.S. should aim for a middle-of-the-road rate, roughly 10 percent. It should be a national, federal tax that replaces the existing state sales taxes.

Victor A. Rice (Varity Corp.): The Canadian system doesn't have that structure.

Ruding: No, and the government made a mistake there, which leads to double taxation. But, at the same time, you must compensate your states for the lost revenues, by mandatory transfer of a fixed annual amount of VAT revenues from Washington to the states.

The practice in Europe is to apply two rates to the VAT, one low, and one higher. You can fiddle around and structure the levels of those rates in such a way that the net effect is roughly neutral; it is neither progressive nor regressive.

My country, the Netherlands, has too high rates. While I was the minister of finance, I continually pushed to lower them. They're now at 17. I would recommend a low rate, approximately 7 percent, for day-to-day necessities--including food and clothing--and a higher rate of 15 percent for other goods. Fourteen percent is now the target in Europe.

Danforth: We have looked into using differential rates to deal with the issue of regressiveness. However, we have heard it's hard to administer these rates, and they lead to bizarre distinctions between bread and Twinkies and so on.

We were told it's better to simply tax everything and deal with the regressiveness in another way. That is why we are thinking about making the individual income tax more progressive while introducing this regressive consumption tax and eliminating payroll taxes.


Kovacevich: Economists say we should introduce a VAT tax because of the terrific results that are achieved in Europe in terms of job growth--but the results I see are high unemployment, a high marginal income tax rate, and a high corporate tax rate.

Nevertheless, people keep saying this wonderful strategy will cause our country to grow and prosper. How are we going to sell this program to Middle America? The language we're using at this roundtable wouldn't be understood on Main Street. Middle American taxpayers want to know: "What is a VAT tax going to do for us that the tax policy today doesn't?" And we just tell them, "Trust us." It won't sell.

Danforth: I often go to town meetings in places such as Springfield, MO. When I talk about the need to move from an income tax toward a consumption tax, my statements draw applause. It is amazing how many people understand the consumption tax.

Kovacevich: I thought that's what an energy tax is, and I don't hear anybody applauding that.

Danforth: No, an energy tax is regionally discriminatory. It has perverse effects. It makes us less competitive. But people understand that something is wrong with the tax system. They're not terribly sophisticated people, but they understand that we should move toward a consumption-based tax system. If we gave this rock on the mountainside a little push, there would be an avalanche of support for it.

Kovacevich: I disagree. If you ask people, "What would you rather have, a consumption tax that is basically a sales tax, or a tax on the corporations and the rich?" I don't think they're going to applaud the value-added tax. Not in my communities anyway.

Baker: If you ask the people who work for Boeing how they would like to compete against Airbus Industries, and you tell them a value-added tax is going to help them do that, I think they would applaud.

Kovacevich: If they believe it.

Murray Weidenbaum (Center for the Study of American Business): I think we need to invent a slightly different approach--a variation of the consumption tax. The result would be similar to a universal IRA, without all the paperwork and restrictions.

Here's what I mean. The individual or family reports current income, has a new schedule where savings are reported, and only pays tax on the difference. The difference is consumption. So, a neat way of reducing your tax burden is to save more.

You don't have to worry about the tax being regressive, because you have a rate table. It's not inflationary, either, because you pay it via a tax return. It doesn't add a new administrative burden; it uses the existing IRS collection system. So, it's really a reform of the current tax system.

In addition, you have to have a companion change in the corporate income tax. In effect, you move to a cash-flow tax where you expense capital outlays in the year you incur those outlays. It's a kissing cousin to a VAT.

Donlon: So, you wouldn't need an investment tax credit?

Weidenbaum: Precisely. And there's no unique way of doing it. Once you embrace the general idea, you have lots of leeway for the inevitable negotiation in the legislative process. This isn't a cast-iron strategy; it's a general approach that improves the economy. Essentially, you're shifting the tax burden from savings and investment to consumption.

Rice: You wouldn't have deductibility of interest?

Weidenbaum: No. This would be a move toward tax simplification. No matter how clean the tax bill you send to the Hill, you won't get a clean one coming back. If the cost of getting a top-down consumption tax is eliminating a provision for savings, then so be it. We're trying to simplify matters to get public support.

Marvin L. Mann (Lexmark International): How would you define savings?

Weidenbaum: Savings is the change in your cash balance of your bank accounts, the change in your holdings in stocks, changes in the holdings of bonds, and, of course, the increase in the equity of your house; this encourages home ownership, an important point in selling such a program to the middle class.

Mann: But not real estate investments?

Weidenbaum: On the contrary. The federal government doesn't tell you how to save. That's your decision.

To get broad-based public support, you should focus on the fundamentals. And that means a tax system that encourages people to save and invest.


Riordan: But these types of improvements to the income tax system will cost revenue. Thus, you need an alternate form of revenue to pay for those improvements. How do you collect less from the income tax without collecting more from something else?

Freedman: You can't.

Weidenbaum: Let's think in more dynamic terms. The new tax schedule would bring in the same revenues as the existing income tax system, and the average taxpayer would pay the same. But at every income level, the person who saves more than average gets taxed less. The person who saves less than average gets taxed more.

Over time, as the economy grows faster because you're generating more savings and investment, you wind up with a bigger stream of revenues without raising the rates. Simultaneously, there is a smaller increase in federal expenditures, without cutbacks in benefits.

One of the best parts of the saver-friendly tax system is you don't pay tax on your capital gains, the cash amount. You reinvest them, roll them over. That's still part of your savings. So, you have an incentive to reinvest your capital gains.

Freedman: It's important to have efficient and fair capital gains taxes. Though the Netherlands is under a VAT system, one of the biggest advantages Dutch companies have is that their capital gains are not taxed, and frequently neither is dividend income.

Baker: One more point about taxes and revenue collection: If we had a VAT tax of 15 percent, and we brought in $500 billion worth of manufactured products abroad and paid no contribution to our federal revenue, that would be a $75 billion contribution that would go into the system without any consumer contribution at all to our federal revenues.


Daniel: I've heard all the arguments for a VAT, but I'm still convinced consumption taxes are not feasible. We have a system that can work if we'll take some hard-nosed approaches to stimulating savings, to reducing the capital gains tax, to giving investment tax credits, and to letting businesses compete.

John S. Chalsty (Donaldson, Lufkin & Jenrette): I disagree. I don't think we have any sense of the inefficiency that is inherent in our current system, because so much of it is hidden. We spend more time wrestling with how we can circumvent the tax law and the tax regulations than we do trying to do what's best for the economy.

Bill Frenzel (Tax Foundation): Each of you TABULAR DATA OMITTED has a better way to run the tax system. But all of your methods--for example, allowing the expensing of equipment--would require revenues to encourage or stimulate savings and investment that are not likely to be available under the current Congress and president. This is not 1981 when we could get any kind of tax cut we wanted.

What Congress gave, Congress was able to take away in the ensuing 10 years. For those of you who think Europe is the nicest place in the world, I suggest you look at the total tax take per GDP. You will find that you don't want any of those systems in any combination, because some of them--in northern Europe, for example--have tax rates 50 percent higher than in the U.S. Only two countries in the world tax at our level: Switzerland and Japan. And the Swiss are raising their taxes.

We now are looking at an energy tax that some people are describing as the stalking horse for the broad-based consumption tax. I think that gives Senator Danforth and others an opportunity to move in and tout an alternative tax system that can be used at least partially as a trade-off for taxes that exist today.

But we have to be careful. The people who promote this consumption tax are going to have to do it on a macro basis, rather than run to their computers to see whether they come out a nickel or a dime ahead. All the time I was in Congress, that's how corporate decisions were made. Everybody asked, "Did it earn me two pennies? Or did it cost me a penny?"

Let's see if the public really wants a system that's simpler and fairer as the senator says it does. Or if they just want a system they hope will soak somebody else. |Laughter.~

Danforth: Several of you think that it's more politically possible to work within the existing tax code for marginal changes that would be more beneficial to business.

In my judgment, the possibility of doing that, especially in a Clinton presidency, with a strong Democratic Congress, is zero. These people have spent a lifetime running against big business and opposing the capital gains differential. I don't think they're going to be moved to make marginal changes within the existing tax code. I do believe it is easier to fight big battles than little ones, because there are a lot of people across the political spectrum who have said that the present tax system is wrong, and that we should have some sort of consumption tax. Despite some waffling, the Clinton administration is still considering the idea.

Therefore, it's easier to change the whole game than to try to win against the team that's already on the field.

Witt: My biggest fear is that Congress and the folks at the other end of Pennsylvania Avenue will put these tax changes on the table, and then we will find the rug pulled out from under us, because the tax simply will be an add-on, not a substitute for part of our current tax system.

Daniel: If we go to a consumption tax under this administration, and it's mishandled, we've got a heck of a mess. Within the current tax system, if we make adjustments, we can create jobs.

Danforth: But the adjustments likely to be made in the current system and the ones proposed by President Clinton are opposites. The existing tax system is wrong. It penalizes savings. It penalizes investment. It penalizes work. It penalizes growth. It encourages consumption.


Donlon: Let's take a poll. Are you inclined to alter the margins or to overhaul the entire system?

Chalsty: The tax system is beyond fixing. Just like a child's toy that's broken, we have to throw it out and start with another.

James F. Orr III (UNUM Corp.): I disagree. I still don't understand the advantages of the VAT. I've spent a lot of time in Europe, and I don't see why it's such a good thing for us to do. I'm afraid that we could put in a VAT system, and suddenly it becomes the vehicle for funding health care.

Ruding: I'm still convinced the U.S. should go for a VAT. For people who claim the system doesn't work because the rates are too high, I tell them it is not the system, but rather the rates that are wrong. The system is good.

Kovacevich: I don't see any reason to formulate a new tax system if it can't be sold to Americans. If we can articulate how a new tax system will leave middle America better off, then we should all get behind it. However, I don't think we have done that here. And if we can't, then we had better attack the current system and modify it.

Timothy A. Schlindwein (Stein Roe & Farnham): I came into the VAT debate a while back feeling cautious. But increasingly, I think we probably have to strike boldly to stem the tide of the tax system's long-term, destructive effect on the economy.

I certainly would settle for a partial solution, but never for a consumption tax that is added on to already high income tax rates.

Riordan: The existing income tax system is complicated. It's expensive to administer. It's pervasive and invasive. It discriminates against savings and investment, and it favors consumption. We should move to collect money from a consumption tax and use that savings to revise the income tax to make it much more like a cash flow-consumed income tax.

Robert M. Brasler (Binswanger): I don't want to be Don Quixote, but I think occasionally you have to tilt at big windmills. Maybe this is the time to revamp the structure. But we need tactics to persuade the leaders in the House and the Senate to convince them that now is the time to make the move.

Weidenbaum: Get Congress to focus on spending cuts for a year, have committees zero in on reforming federal regulation, and educate the public on the need for a broad-based consumption tax. Then the following year, push for it, enact it, and don't fuss with it for a four- or five-year period.

James W. Olson (Equitable Building & Loan Association): We must have a short-term plan and a long-term one. This administration is not going to give up on its social change. These changes have to be funded, but the method of funding may not be good for the country in the long haul.

I am from Nebraska, and everyone there seems far more concerned about state and county property taxes, and taxes on farm equipment and livestock than they do about the overall income tax.

Baker: Let's stop making short-term fixes. We need to adopt a tax system that facilitates, rather than discourages, investment, creativity, and savings.

In our debate today, we got two things confused: the level of taxation required to support government and the way we raise it. We have to keep those things distinct. We need a certain level of taxation, but we should raise it in a way that is broad-based and that does not discourage industry from creating jobs, inventing products, and competing successfully in the international marketplace.

Daniel: I, too, am disillusioned with the current system. But to allow a significant or meaningful change to take place under this administration--which totally excludes businessmen, and which was put into office not by businessmen and taxpayers, but by recipients of taxes--is a risk nobody in the silver and gold business is willing to take.

We ought to concentrate on reducing spending instead of increasing taxes.

Witt: That's true. The 14 tax increases we've endured over the last 12 years have not reduced the deficit, as some of Murray Weidenbaum's work indicates. Just look back to the fiscal year 1988 budget. Nothing was done on the tax side. No taxes were cut, no taxes were raised. Spending growth was held to less than 5 percent. And we saw the budget deficit fall from $220 billion to $172 billion.

I suggest we consider an across-the-board federal spending freeze. Spend no more this year than was spent last year.

Frenzel: I'll second that motion. Dan and I just got back from a trip through the heartland of the Midwest, and we wanted to talk about taxes. Nobody out there did. They wanted to talk about cutting spending. And they're darn right. If we cannot roll back the spending, or at least stop its inexorable increase, nearly everything we do will be in vain.

Dominic A. Tarantino (Price Waterhouse): If we had a consensus here on anything, we probably would all agree that spending must be controlled. But I also feel that the tax system may get away from us, because we have a president who has to raise revenues. We also have the health-care program that is going to require a very large cash infusion. And unless the consumption tax debate is joined with the discussion of the health-care program, again, we may get more add-on taxes.

Mann: I think we're going to get a consumption tax, whether we go for it or not. I am not terribly optimistic it will succeed in the short term. But I also feel that we have to be careful about how much time and energy we put into pushing for a consumption tax, because the basic issue is spending.

Michael A. Henning (Ernst & Young): I think the present system is too complex, particularly in the international area. I was involved in a major transaction with a client, a consortium of foreign and U.S. companies. And the foreign side said, "Is planning compliance with the tax system what grown-ups do for a living in the U.S.?"

It is time to try and at least throw on the table the notion of a major overhaul and the notion of an integrated tax system, eliminating the possibility of double taxation.

Harry G. Hohn (New York Life Insurance): Why do we think the VAT will be any different in the U.S. than it is in Europe or Canada? I can just see a whole bureaucracy picking apart the VAT the way we have the income tax.

I think our income tax system is a better theoretical system to raise revenue. But we've broken it. We fiddled every damn year with the thing. You can't predict where it's going to go the next year or every time a new administration comes in.

Rice: I am a passionate believer in the VAT system, because I think it is the biggest opportunity the U.S. has to increase the tax revenue pool. The only thing I haven't heard said around this table is that Clinton's increases in income taxes won't increase revenue one iota.

This revelation is going to come as a rude shock in about 18 months time.
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Title Annotation:CE Roundtable
Publication:Chief Executive (U.S.)
Article Type:Panel Discussion
Date:Jun 1, 1993
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