The 6.5 Percent Solution

Here's an idea that's bound to irk the formidable small-business lobby. Democrat Alice Rivlin, a member of President Barack Obama's deficit reduction commission, has proposed that the nation fill the widening chasm of its budget gap by raising revenue with a first-ever national sales tax. And the number she has in mind is pretty big: 6.5 percent.

OK, technically speaking, it would be the second national sales tax. Health care reform imposed a 10 percent federal surcharge on tanning salons. But generally speaking, the Rivlin idea would introduce a new tax in the U.S.

Now, some Republicans have argued for years that the current system of taxes should be replaced by a national sales tax or a value-added tax. But Rivlin would impose the sales tax on top of an altered version of the current structure. Another feature of the plan is a $650 billion payroll tax holiday designed to boost the economy.

And here's another point that is bound to irritate the political opposition. National sales taxes are already commonplace in Europe, where they run as high as 25 percent. Could anything set off the alarms more than a Euro-style expansion of federal taxes? No, we didn't think so.

And perhaps that is the point. As Bloomberg notes, "the Rivlin plan may help the presidential panel sell unpopular remedies by painting an even starker picture of the measures needed to tame the debt." The National Commission of Fiscal Responsibility and Reform, which Rivlin belongs to, has called for unpopular measures such gradually raising the retirement age to 69 and phasing out the mortgage interest deduction.

The U.S. Chamber of Commerce, the main small business lobby, declined to comment on any specific proposals in the plan, although it did issue a statement saying the two debt reduction plans circulating througn Washington are "a powerful reminder of three things: the tremendous harm we are inflicting on our economy by failing to get the deficit under control; the unconscionable burden we are passing on to future generations; and that practical solutions can be found when public leaders work together on a bipartisan basis and with the long-term interests of the country in mind."

Rivlin, speaking through the Bipartisan Policy Center in Washington, says the national commission report doesn't go far enough to reduce the deficit, which is expected to be 8.9 percent of the gross national product in 2011. That is creeping toward the 12.7 percent level that has been such a problem in Greece. The Obama administration wants to reduce the deficit to 3 percent of GDP.

Rivlin says it's impossible to balance the budget simply by boosting economic growth or by raising taxes on the wealthy, which means that she is bound to anger everyone on the right, the left, and in the middle.

"We are proposing a very drastic tax reform," Rivlin says. "It would give us a slightly more progressive tax system than we have now and is definitely simpler and more pro-growth."

Former Wyoming Senator Alan Simpson, the co-chairman of the national commission, says Rivlin and the independent policy center are flying solo on the sales-tax idea.

“There’s no need to get into it about their plan versus our plan,” he told Bloomberg. “We’ve pissed enough people off in America to last forever. We don’t need any more people.”

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Steve Rosenbush is the blogs/industry editor for Portfolio.com.