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Pluses and minuses of a 'consumption tax'

A plan to tax individuals not on what they make but on what they spend, now under consideration by the Reagan White House, would boost the supply of money available for modernizing American industry, tax experts say.

But a so-called consumption tax would also involve massive technical and political problems, these sources add, and would require extremely careful design if the government did not want to sacrifice billions of dollars in tax revenue.

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''Taxing consumed income is a promising approach to tax reform,'' Martin Feldstein, chairman of the President's Council of Economic Advisers, told a business group Wednesday. It is an approach ''that could guide decisions of a full-scale redesign of our tax system or of more modest, piecemeal reform,'' he added.

The administration's consumption tax is relatively straightforward. To arrive at his or her taxable income, an individual would add all cash receipts for the year and subtract all savings, including additions to bank accounts and purchases of stocks or other assets. Repayments of loans could also be subtracted from taxable income.

''The difference between total receipts and total savings-investment outlays would be the amount on which he paid tax,'' Mr. Feldstein says.

The administration makes it clear that the consumption tax plan is only one of a variety of options the President is considering for long-range tax reform. A consumption tax ''is only being considered at this time,'' Mr. Feldstein cautions. ''Final decisions have not been made.''

Analysts note that a consumption tax offers some significant advantages over the current tax code. The chief argument in favor of such a system is the spur it gives to savings. ''If you tax consumption but not income, you encourage savings,'' notes Nariman Behravesh, the director of economic policy analysis for Wharton Economic Forecasting Associates, Inc. Currently the government taxes interest income from savings.

By boosting the savings pool, there would be more money for businesses to borrow to invest in new machinery. Such investmments would enhance productivity and thus sharpen American industry's competitive edge. A consumption tax also would encourage individual investment, since profits on the sale of stock or other assets would only be taxed if they were spent and not reinvested.

But a consumption tax would force policy makers to face a number of tough problems.

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One is the potential loss of revenue such a plan would entail. Under Feldstein's proposal, the government would lose the money it makes through current taxes on interest on savings accounts or stock dividends if those funds were reinvested rather than spent. The same would hold true for capital gains earned when an individual sells income-producing assets such as like stocks or real estate.

''That entails very substantial losses in federal revenue,'' notes Thomas F. Field, the executive director of Tax Analysts, the publisher of the newsletter Tax Notes. ''We are talking $50 to $100 billion.''

Of course the government could recoup the money. ''They could either adjust tax rates or do away with deductions. It is the same problem you have implementing a flat tax. Deductions are very difficult to get rid of,'' says Paul Huard, the vice-president of the National Association of Manufacturers.

''The transitional and political problems are horrendous,'' Mr. Behravesh adds.

Then too, policymakers would have to deal with the issue of fairness. For example, an individual with an income of $100,000 a year and one with an income of $1 million might spend the same amount on ''consumption.'' This means the tax the millionaire pays would be a smaller proportion of his income than the tax paid by the person earning $100,000. Theoretically, under the current income-tax system, as income rises, so does the rate at which it is taxed.

Feldstein notes that once incomes have been adjusted to account for savings and investment, they can be taxed at progressive rates under a consumption tax plan.

''The progressivity of that rate schedule is quite a separate issue from the question of the appropriateness or desirability of basing individual tax liabilities on a measure of consumption rather than a measure of income received or accrued,'' Feldstein says.

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