Administration Opposes Consumption-Based Tax Plan : Government: Such a system holds promise only in theory and would burden low- and middle-income families, officials say.

WASHINGTON — The Clinton Administration said Wednesday that it strongly opposes a plan--backed mainly by Republicans--for a tax system based on consumption rather than income, saying that its advocates have not made a compelling case for a national sales tax or a value-added tax.

Administration officials challenged the GOP majority in Congress to instead work with President Clinton to bring more fairness and simplicity to the existing system, which they said would reduce the incidence of tax evasion.

Testifying before the House Ways and Means Committee, Assistant Treasury Secretary Leslie B. Samuels conceded that a consumption-based tax holds great promise--but only in theory.

Such a tax “could increase saving and capital formation and thereby raise our standard of living in the long run . . . [and] improve economic efficiency and simplify the tax system,” Samuels said.

But a consumption tax also would be likely to impose a greater tax burden on low- and middle-income families. And a conversion to a new tax system is fraught with “intended and unintended winners and losers,” he said.

Samuels said that the array of consumption tax proposals, some of which have picked up a sprinkling of Democratic backers in both houses of Congress, need considerable analysis. “Replacing the entire income tax with a consumption tax would be a grand experiment of applying theory to a practical application that no other country in the world has chosen to undertake,” he said.

But he also acknowledged the “many defects” in the current system and said that the Administration welcomes debate on tax reform.

Consumption tax plans come in different forms but they generally would tax income only when it is spent on consumer goods and services.

Ways and Means Committee Chairman Bill Archer (R-Tex.), who favors a sales or value-added tax, was clearly miffed by Samuels’ critique, and he chastised the Administration for essentially defending the status quo and for not putting forward its own tax reform proposal.

The Administration’s opposition to a new tax system is unlikely to have much immediate impact, since Republicans are not planning to push any of their proposals this year.

Instead, the GOP, whose leaders have named a commission to study the issue, is maneuvering to give tax reform a prominent role in the 1996 presidential campaign.

The Administration’s tax reform stance, coming on a day when the President also vetoed a spending-cuts bill that was dear to the Republicans, further underscored the increasing dissonance between the Republican Congress and the Democratic White House as they approach their biggest fight of the year--reaching agreement on a federal budget for fiscal 1996.

But in resisting efforts to embrace a consumption tax, the President will also have to deal with some influential Democrats.

At Wednesday’s hearing, for instance, Sen. Sam Nunn (D-Ga.) took issue with Clinton’s position, saying: “Our tax system needs more than a Band-Aid. . . . We have to scrap the current tax system.”

Nunn and Sen. Pete V. Domenici (R-N.M.), chairman of the Senate Budget Committee, are co-authors of the proposed Unlimited Savings Allowance Tax Act, which would institute a combined income- and flat-tax system that they believe would encourage Americans to put more of their money into savings. Co-sponsors include Sens. Robert F. Bennett (R-Utah) and Bob Kerrey (D-Neb.), who chairs the Democratic Senatorial Campaign Committee.

Another tax reform proponent is Rep. Sam Gibbons (D-Fla.), the top Democrat on the Ways and Means Committee.

The leading proposals:

* A flat tax, variations of which are being pushed by House Majority Leader Dick Armey (R-Tex.) and Sen. Arlen Specter (R-Pa.), a candidate for the GOP presidential nomination.

* A national sales or value-added tax, versions of which are being advocated by Gibbons and Archer, among others.

* A graduated tax on individual incomes and a flat 11.5% tax on businesses. The idea is being advanced by Nunn, Domenici and others. The plan would allow individuals to shield from taxation all income that they save.

One underlying assumption shared by the Administration and virtually all tax reformers is that the savings rate among Americans has reached alarming, historic lows.

Samuels acknowledged that the low savings rate is a “very serious concern” but he said the decline “does not appear directly related to changes in tax policy.”

The ability of a consumption tax to increase private savings, Samuels added, “is uncertain and could be small.”

The average national savings rate is now just 2.1%, down from 3.6% during the 1980s. Some of the major U.S. economic competitors have a comparable savings rate of 10% to 18%, Nunn said.