Rep. Al Ullman (D-Ore.) is planning substantial revisions in his proposal 10 percent "value-added tax" in effort to counter criticisms that it is regressive and would make it too easy to finance future increases in government spending.
The House Ways and Means Committee chairman says he will alter the proposal -- actually a form of national sales tax -- to exempt purchases of food, shelter, medical care and government services entirely, rather than simply taxing them at a lower rate.
He also is planning to add a rider that would limit total government spending to a fixed percentage of the gross national product. A similar plan has been proposed by House Budget Committee leaders.
Sources say the changes are intended to meet the two major criticisms that the measure has encountered. Liberals have complained the tax would hit the poor proportionately harder than the high-income taxpayers, while conservatives say it would pave the way for further growth of government.
The original version Ullman unveiled in October contained neither the exemptions nor the spending limitation. The measure would have imposed a flat 10 percent tax, with a special 5 percnt rate for food, shelter and medical care.
Ullman said the reversions will be made public within a few weeks.
The series of new exemptions would cut the additional revenues the VAT would bring in to about $90 billion a year -- down from $130 billion anticipated earlier -- and also scale back Ullman's plans to trim other forms of federal taxes in return.
As a result, Ullman says he also will have to limit the reductions he hoped to make in the income and Social Security tax. The chairman had intended to use the new VAT revenues to cut these taxes by about $50 billion each.
In additional, Ullman is preparing two other changes to his earlier VAT proposal -- an increase in the previous exemption for small businesses, and a requirement that retailers post the VAT on each item at the point of sale.
The second changes is in response to criticism by consumers that the VAT is actually a hidden tax because it is included as part of the sale price and not added separately, as state sales taxes now are.
The proposal Ullman unveiled in October would have exempted the first $10,000 in transactions by any small business. Ullman aides say the chairman plans to raise that exemption level, but is not sure yet how much.
The value-added tax, widely used in Europe, is a form of national sales tax that is levied in portions at each stage of the manufacturing process. Like a regualr sales tax, it ultimately would be passed on to consumers.
Ullman proposed the new VAT as part of a sweeping new plan to revamp the basic U.S. tax system. The Oregon Democratic contends that shifting to a consumption tax such as the VAT would encourage needed investment.
However, while the VAT has drawn support from some more conservative economists, it has not won the backing of either the comittee or the Carter administration. Liberals have complained the VAT would be too regressive: The same 10 percent tax woud be imposed on everyone, regardless of ability to pay.
And Ullman himself concedes the tax would result in a massive initial surge in inflation. Because it would be part of any sales price, the 10 percent levy would be counted in the consumers price index.
Ullman earlier had been reluctant to exempt large categories of purchases entirely, on grounds that it would scale back the amount of new revenues the measures would raise and blunt chances of using them to revamp the tax system.
However, the Ways and Means chairman said he now believed it was "politically not viable" to try to push through a VAT that did not fully exempt food, housing, medical care and government services.
The proposal Ullman is drafting to restrict government spending would limit outlays to a fixed percentage of GNP -- the dollar value of all goods and services the nation produces. The percentage would be reduced gradually over the years.
The limit would not apply to so-called "tax expenditures" -- tax preferences such as the current deduction for home mortgage interest -- which have become a burgeoning problem for budget makers.
A similar plan has been introduced by House Budget Committee Chairman Robert N. Giaimo (D-Conn.), but with a limit on tax expenditures as well. Ullman says he thinks restricting tax expenditures would be bad policy.