New Idea for This Side of the Pond

A provocative proposal from the Californian who chairs the House’s powerful tax-writing committee may represent a high-risk opportunity to jump-start President Bush’s Social Security initiative, even as it underscores the difficulties confronting the administration plan, analysts in both parties say.

Rep. Bill Thomas (R-Bakersfield), head of the House Ways and Means Committee, has stirred controversy, interest and surprise recently by insisting that Congress should broaden the debate on Social Security beyond individual investment accounts, which Bush is emphasizing, to the more fundamental question of how to fund retirement and healthcare security for America’s aging population.

Thomas has suggested replacing the payroll tax on wages, which has funded Social Security since its inception, with a value-added tax common in Europe -- a levy that would function like a national sales tax.

Such a tax, Thomas has indicated, could potentially raise enough money to fund not only Social Security and the private investment accounts Bush favors, but also more of the healthcare costs for the elderly that are now crushing state budgets through Medicaid.

Operatives in both parties see Thomas’ willingness to float such an ambitious idea as a sign of Republican concern that Bush’s emerging approach is unlikely to pass.

“It’s like you’re in one of those mazes where you say, ‘I know I’m in a dead end with this path, so I’ll try the other fork,’ ” said Grover Norquist, a leading conservative activist close to the White House. “That may be a dead end too. But he thinks that as long as it is going forward, he has a chance to bring life to it.”

If Thomas can generate momentum for his proposal, some analysts believe it could spark bipartisan cooperation on an issue bitterly dividing the parties.

“Potentially, it is a win-win scenario,” said Maya MacGuineas, who has co-written a similar plan as director of fiscal policy at the New America Foundation, a centrist think tank.

The risk for Thomas is that any prospect of restructuring Social Security might sink under the added weight of a tax-reform proposal that would affect every American family and business.

Thomas, an independent and sometimes irascible legislator, has a reputation for attracting notice with ambitious ideas. Under limits imposed by House Republicans, he’s serving his final term as Ways and Means chairman, and many observers believe he’s floating his proposal -- and other bold ideas -- in part because he hopes to “go out in a blaze of glory,” as one put it.

Along with his tax-reform proposal, Thomas has suggested that because women on average live longer than men and African Americans have a shorter life expectancy than whites, Social Security should consider adjusting benefits to gender and race, especially if Congress increases the retirement age. That approach implies that women would receive smaller monthly benefits than men and African Americans would receive larger benefits than whites.

Thomas supports establishing individual investment accounts under Social Security but has said that as part of such a change Congress also should address the rising cost of long-term care for seniors -- an expense that is increasingly burdening states through the Medicaid program for the poor.

Most sweepingly, Thomas has argued that Washington should consider a new means for funding its programs for the elderly.

Social Security is funded through a 12.4% payroll tax, split equally between workers and their employers, on the first $90,000 of wages.

But Thomas asserted that as society aged, Washington should consider moving from the payroll tax toward a value-added tax -- known as a VAT.

“My argument ... is why even bother looking at the payroll tax?” Thomas said. “Why don’t we ... think about bringing in revenue in a way that doesn’t punish the employer?”

First imposed in France in 1954, a VAT taxes the increase in price at each stage of a product’s production -- the “value added” -- and is ultimately paid by consumers at the cash register. All members of the European Union use a VAT, with rates ranging from 15% to 25%, according to the EU website.

A VAT would need to be set at about 14% to replace the Social Security payroll tax, fund a small individual investment account and absorb the public cost of long-term care for the elderly, according to Peter Orszag, a tax expert at the Brookings Institution in Washington. At that level, a VAT would add roughly $2,800 to the cost of a $20,000 car or $7 to a $50 pair of sneakers. But workers would save thousands if the payroll tax were eliminated in return.

Advocates view the VAT as easy to administer and economically efficient because it rewards savings over spending.

“There are three good arguments for a VAT,” said Harold L. Wilensky, a retired professor of political science at UC Berkeley, who has studied the issue. “One, it is easy to collect. Two, it is easy to enforce. And three, it is good for the economy.”

Thomas’ ideas leap so far beyond the entrenched lines of debate over Social Security that so far, neither party appears certain how to react.

The Democratic National Committee condemned his suggestion of tying benefits to race or gender but did not comment on his VAT idea. Bush, at his news conference Wednesday, was noncommittal, saying only that he welcomed a broad discussion.

A move from the payroll tax toward a VAT would face large political hurdles.

One source of opposition would be the historic reluctance among Democrats to fund Social Security with anything except payroll taxes; they believe that link strengthens the program politically by creating the impression that workers are funding their own retirement, as if they were paying premiums on an insurance policy.

But that orthodoxy has been eroding. A Clinton administration plan, for instance, eventually would have transferred large sums of general federal revenue into Social Security.

Traditionally, Democrats have also opposed a VAT, or any consumption tax, because they consider it unfair to low- and middle-income families who must spend a higher percentage of their income on consumption than the affluent.

But that complaint has usually emerged in discussions about substituting a VAT for the progressive income tax; it may be less relevant in a debate over replacing the payroll tax, which also favors the affluent because it does not tax annual wages above $90,000.

Gene Sperling, former director of the National Economic Council under President Clinton, said Democrats should at least be willing to explore the proposal Thomas had floated.

The biggest obstacle for Thomas among Republicans is fear that a VAT would grow and become an engine for expanding government, as in Europe.

“People will say, ‘Raise it a percentage point here, or a point there,’ ... and then, presto, we’re France,” said Dan Mitchell, a senior fellow at the conservative Heritage Foundation.

Norquist, president of Americans for Tax Reform, expressed similar concerns. But he said he would not mobilize opposition to Thomas’ idea, at least in the near term, because he’s pessimistic that Bush’s current plans for Social Security restructuring could obtain the 60 Senate votes required to break a Democratic filibuster.

“It makes sense to allow a conversation to go forward about different ways to get Social Security reform,” Norquist said. “Within the next two years, it may be impossible to cut this deal [to restructure Social Security]. But if anyone can do it, Thomas can. Not only do I think that, but he thinks that.”