While Democrats and Republicans continue to bicker about tax cuts, they are ignoring the debate we should be having. That is, how can this nation fundamentally reform the tax code to achieve three critical goals: simplification, economic growth, and equitable tax burdens? What we need is a complete overhaul of our tax system -- from one that encourages a debt-consumption economy to one focused on saving and investment. This can best be done by instituting a "progressive consumption tax."

The current income tax is a labyrinth of exemptions, deductions, and credits, so complicated that even accountants need accountants. Many citizens feel that their taxes are too high while others, who know how to work the system, pay close to nothing. Obviously, the tax code is in need of reform, but how to go about it? One camp of reformers prefers changes that would help grow the economy by shifting incentives within the code. The other camp is more concerned with "tax equity" or ensuring that tax burdens are spread fairly, given the unequal distribution of income in this country.

Growth vs. Fairness

Indeed, the pro-growth camp makes compelling points. Income taxes, by punishing economically desirable behaviors such as work and saving, can hobble investment -- the ultimate drivers of the economy. From this perspective, the Bush administration's proposals to reduce income tax rates, eliminate dividend taxes, and create tax-free saving vehicles, make a great deal of sense. But there are two disqualifying flaws in their approach. First, because the plans are deficit-financed, any increase in personal saving would be counterbalanced by a decrease in government saving, leaving the economy no better off.

Second, the distributional impacts are unfair, as tends to be true for most consumption-oriented taxes. Low-income earners must spend a larger share of their earnings in order to survive, while higher-earners can obviously save more. Taxing only consumption (or exempting saving), means low earners are left with relatively higher tax burdens.

For example, assume the income tax were replaced with a flat rate tax of 25 percent with all savings exempt. A $20,000 earner who spent every dollar would have a 25 percent tax rate, while a $500,000 earner who spent one-third of his earnings and saved the rest would only pay 8 percent of his income in taxes.

In contrast, a progressive consumption tax, while growth-oriented, is as fair as it is efficient. Taxpayers would pay taxes not on what they earn, as they do now, but only on what they spend. This shift would undoubtedly encourage personal saving, benefiting the economy greatly over time.

Each year, rather than struggling to calculate whether they qualify for deductions on things like medical expenses, mortgage payments, IRA contributions, child care expenses, favored real estate investments, bad weather conditions, etc. -- taxpayers would simply take one comprehensive deduction for all saving. We would merely total income from all sources such as wages, interest, investment income, and then subtract what we saved or invested. But, importantly, the rates at which consumption would then be taxed would be graduated, as they are now.

For example, under a progressive consumption tax, the first $20,000 of spending could be tax-free. You would pay a 20 percent tax on all spending between $20,000 and $90,000 and a 35 percent tax on all spending above $90,000. In effect, most necessities would not be taxed, while most luxuries would be taxed at higher rates. (Policy makers have tried to achieve some of this before by taxing luxuries such as yachts, but failed miserably -- hurting yacht makers and causing the wealthy to buy jets instead of boats. A progressive consumption tax would not discriminate between types of purchases, thus not distorting the markets for goods and services. It would, however, create incentives to save, while recognizing that wealthier individuals can afford to save more. Ultimately, people would be taxed on what they take from the economy, not on what they contribute to it. A simpler, fairer tax code.

Phasing in a progressive consumption tax would also simplify a tax code fat with exemptions by replacing them with a single saving exemption. Not only would the code be far simpler, the tax base would be broader, allowing for tax rates to be lower than they otherwise would have to be to bring in the same amount of revenue as the existing income tax.

Does this idea have a chance? That depends. Taxes will certainly be central to the upcoming presidential election. So far none of the contenders is delivering a particularly compelling message on the topic.

But, most voters know that aside from short-term targeted and temporary stimulus measures, tax cuts should be off the table -- certainly until we balance the budget and address the nation's underfunded Social Security and Medicare programs. Accordingly, someone will have to provide an alternative to the president's never-ending mantra that tax cuts are the solution to everything. Scaling back the president's tax cut to arrive at a "Bush-lite" plan doesn't do the trick, nor will offering, as Vice President Al Gore tried, a targeted tax cut for everything under the sun.

The mantle of a true tax reformer is there for the taking. Some form of a progressive consumption tax, which would satisfy both the principles of tax efficiency and tax fairness and set the economy on a course to increased saving, investment, and growth, could ultimately provide a winning agenda.