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5 IRET Congressional Advisory 1 (1992)

handle is hein.taxfoundation/iretcgadv0005 and id is 1 raw text is: March 10, 1992 No. 5 THE SENATE FINANCE COMMITTEE'S TAX BILL BLOCKS RECOVERY AND GROWTH By a straight party line vote, the Democrats on the Senate Finance Committee have approved a tax package that places income redistribution above economic growth. The plan would establish a new, top statutory tax bracket of 36 percent and further raise marginal tax rates by means of a 10 percent millionaires surtax. The bill's main political treat is an expensive, nonrefundable child credit that would decrease total taxes for most people with children but have mixed incentive effects, reducing marginal tax rates for many lower-middle income taxpayers while substantially raising tax rates for many people in the $50,000 - $70,000 adjusted gross income range. Although the bill includes several provisions that, taken by themselves, would modestly lessen government-created tax barriers to economic growth, its overall thrust would be a setback for the economy. The President's 7-Point Plan The immediate impetus for the Finance Committee Democrats' action is the President's tax plan and his demand for quick Congressional action. Reacting belatedly to the prolonged recession and three years of meager economic growth, President Bush used his State of the Union Address to call for quick-fix and pro-growth policy initiatives. Unfortunately, the 7-point tax plan the House Republicans extracted from the President's package was more show than substance. Several of these proposals identified areas of the tax code that conflict with sound tax principles and that strongly discourage saving and investment -- the capital gains tax, the alternative minimum tax, the passive loss limitation rules, and cost recovery schedules that bar investors from deducting capital costs when incurred. But to minimize the government's revenue loss, the Administration so limited the provisions as to strip them of most of their potency. The President's bill was rejected by the House. The key to a successful, pro-growth tax package is the reform of tax policies that are now slowing down the economy. The current income tax system weakens America because it penalizes people when they work (earnings from work effort are taxable while the rewards of non-monetary pursuits are tax free) and it taxes people more heavily when they save than when they consume. People naturally respond to these tax disincentives by working, saving, and investing less than otherwise. The result is that the nation produces less and has less income than if the tax laws less penalized these efforts. In addition, future increases in productivity, international competitiveness, job opportunities, real wages, and living standards are smaller than otherwise because the tax tilt against saving and investment reduces capital formation, which is a primary contributor to economic growth. The President's bill did not effectively address the anti- growth elements in the existing tax system. The House Bill The tax bill devised by House Democrats and passed by the House would impede economic growth. The thrust of the bill is income redistribution. The legislation would permanently increase tax liabilities for higher-income individuals by adding a fourth statutory rate bracket of 35 percent, a 1 percent increase in the individual alternative minimum tax, and a 10 percent millionaires surtax. All of these measures would permanently increase marginal tax rates for the very people who tend to be the most productive and have 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, NW., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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