Tax Reform: 'Split-VAT' Is Possible Option

U.S. President George W. Bush's advisory committee on federal income tax reform isn't due to make recommendations to the White House until this summer. It's too early to say with any certainty what the nine-member panel's recommendations will be, although scrapping all current corporate and individual income taxes and replacing them with a national sales tax seems unlikely.

However, something called a split-VAT (value-added tax) or a flat consumption tax could be one of the broad reform options, suggests Merrill Lynch & Co., New York. Such a tax scheme would combine a VAT on corporations, essentially a levy imposed the value added at each stage of production, with a personal income tax. "The combination of a corporate VAT and personal income tax may be what [reform committee co-chair and former senator] John Breaux is leaning towards," says Merrill. "However, many Republicans are against such an approach since they argue it provides the federal government with too many avenues to increase future taxes," observes the financial firm.

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