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4 IRET Congressional Advisory 1 (1992)

handle is hein.taxfoundation/iretcgadv0004 and id is 1 raw text is: February 24, 1992 No. 4 WHERE'S THE GROWTH? PRESIDENT BUSH'S 7-POINT PACKAGE IS TOO WEAK; THE HOUSE DEMOCRATS' ALTERNATIVE IS ANTI-GROWTH In his State of the Union Address, President Bush presented a program of tax and other policy changes intended to overcome the recession and promote economic growth. At the President's request, a shortened list of his tax proposals was introduced in the Congress. The Democrats on the House Ways & Means Committee, led by Rep. Rostenkowski, quickly countered with a plan of their own. Both packages are disappointing, but for different reasons. Both are collections of ad hoc measures rather than carefully constructed programs for removing tax barriers to economic progress. The President's bill, although it has a few positive features, is much too weak; it would do little to correct government-created tax and regulatory disincentives to work and saving. The plan developed by the Ways & Means Committee Democrats is primarily redistributional; its insistence on big tax increases for upper-income individuals would further damage work and saving incentives. Its two key elements are a temporary tax reduction for the poor and middle class and permanently higher tax rates for people with larger incomes. A growth plan, to be successful, must focus on reducing made-in-Washington barriers to production and employment. The existing tax system, particularly the income and payroll taxes, raises the cost of working. The corporate and personal income taxes impair America's ability to grow by penalizing saving and investment relative to immediate consumption. Government regulatory policies increase production costs, diminishing the economy's capacity to produce goods and services. Several good ways to mitigate tax biases against saving and investment would be to reduce or eliminate the capital gains tax, to ease restrictions on individual retirement accounts so more households will use them, to speed up capital cost recovery allowances so businesses can deduct capital expenses closer to when the costs are incurred, to replace the passive loss limitation rules with other rules that hit only abusive tax arrangements, and to downsize if not abolish the ill-conceived alternative minimum tax. A powerful way to encourage work effort, particularly by low- and middle-income individuals, would be to roll back the 1990 social security tax increases. The reforms should be permanent, not temporary. Temporary measures bring no lasting improvements in production or employment. They invite a stop-and-go economy in which any apparent gains today are only borrowed from the future. Permanent measures, on the other hand, encourage quick and continued increases in work effort and investment. If tax biases against saving and investment were moderated, for example, production and employment would begin rising almost immediately as many more investment projects suddenly became attractive. The benefits would build through time: the progressively larger and more modern stock of capital would sustain improvements in productivity, international competitiveness, job creation, real wages, and living standards. A frequent objection to permanent tax reforms is that they lose too much revenue. But the official revenue estimates ignore the favorable impact of a Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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