(FORTUNE Magazine) – PRESIDENT BUSH HAS PROPOSED reforming both the Social Security system and the tax code over the next two years. His strategy is to deal with each issue separately--Social Security first, followed by tax reform later this year after a tax commission reports.

But who cares what President Bush thinks? The real question is: What does Bill Thomas think? As everyone --okay, everyone in Washington-- knows, Thomas (R-Calif.) is the chairman of the House Ways and Means Committee. That means he controls the committee that controls Social Security and tax reform. As a loyal Republican, he might go along with whatever reform plans the administration suggests. Or, as a freethinker with a notorious independent streak, he may decide to be the bad anchovy on the President's pizza and come up with his own damn plan. Either way, when Bill Thomas talks, politicians listen.

And what Thomas is saying just now is that it's going to be exceedingly difficult to reform Social Security and taxes separately. These are two emotional, divisive issues, and--skipping over vast swaths of procedural minutiae here--dealing with both on two separate tracks would be too much legislating, even for Congress. "We can deal with Social Security and taxes simultaneously," he said in a recent speech. "I think we're going to have to."

Let's recall the goals here. On the Social Security side, the President wants to establish personal retirement accounts so that younger workers will have ownership and control of some of their benefits. On the tax side, there is a pressing need to reform the alternative minimum tax (AMT) and improve the competitiveness of American businesses.

Thomas, who's all for private accounts in principle, is wary about using Social Security money to fund them, which the President has proposed. As Thomas said in that same speech, "There are other ways to deal with the issue that are smarter in terms of maintaining competitiveness for our business structure both at home and abroad, and that raise revenue in ways that are not as depressing in terms of job availability as the payroll tax."

But if the payroll tax is out, what does Thomas intend to fund these accounts with? That would be the income tax, a portion of which would be diverted into the accounts. Next question: How would the government recover from the shock of such a sudden plunge in tax revenue? As Thomas, freethinker mode fully engaged, suggested on Meet the Press a few days after his speech, we might cover the difference with a value-added tax, or VAT.

You're thinking: What? A Republican suggesting a new tax? That's right, and if there were such a thing as a good tax, the VAT would be it. An enticing feature of the VAT is that it's rebated on exports and applies to the full price of imports, so foreigners pay for part of it. Currently, every time an American firm exports to Europe, in effect it pays the tax, whereas European firms that export to the U.S. do not. This mechanism arguably gives countries with a VAT a competitive advantage over those without one, such as the U.S., which is now the only major country on earth without such a tax.

Enacting a VAT would also help address the nation's competitiveness problem if it is used to offset some or all of the corporate income tax, which cannot be rebated on exports under world trade law. Even after those offsets, a 10% VAT--half the rate prevalent in Europe--would still leave money to fix the AMT and other glaring tax problems, thus fulfilling the President's promise to reform and simplify the tax code.

Past efforts to enact a VAT have failed mainly because it's regressive, that is, it takes more from the poor than the wealthy in percentage terms. But rebating some of the tax into the personal accounts of poor people could redress this problem. It could work something like the existing earned income tax credit, which was created to offset the payroll tax burden of workers with no income-tax liability.

Now back to Thomas's thinking. He knows that keeping private accounts outside Social Security would leave intact a program that the Democratic Party views as its greatest domestic achievement, while at the same time giving the President the substance of what he wants. Their honor unsullied, Democrats might be more willing to address the program's long-term costs, as they did in 1977 and 1983 when the benefit formula was revised and normal retirement age was raised from 65 to 67.

What's really going on is the makings of a grand bargain: Social Security gets saved, the President gets his personal accounts, and the tax code gets improved all in one giant package deal. Just the sort of challenge Bill Thomas lives for.

BRUCE BARTLETT is a senior fellow at the National Center for Policy Analysis and was a staffer in the Reagan and George H.W. Bush administrations. E-mail him at guestwriter@fortunemail.com.