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76 IRET Congressional Advisory 1 (1999)

handle is hein.taxfoundation/iretcgadv0073 and id is 1 raw text is: IRET March 5, 1999 No. 76 USE BUDGET SURPLUSES FOR TAX REFORM Although the Clinton Administration projects enormous federal budget surpluses-$4.5 trillion over the next 15 years-it opposes using even one cent of that for a net tax cut. Instead, the Administration's budget plan calls for using some of the projected surpluses to expand the size of government, while reserving the majority for debt repayment. Its proposed budget actually seeks, according to the Administration's numbers, $78 billion of tax increases and $26 billion of user distortion by piling additional layers of tax (for instance, the corporate income tax and the estate and gift tax) on saving and investment and their returns. The differentially heavy taxation of saving and investment naturally discourages those activities. Because saving and investment largely determine the quality and quantity of the capital stock and because the capital stock powerfully influences people's ability to produce goods and services, the sorry result of the tax biases is a smaller, less productive economy. The tax system also penalizes working and earning taxable income because of its high and graduated marginal rate structure. Again, the result is a smaller, weaker economy. An additional problem with the tax system is its complexity. According to some estimates, tax paperwork takes away from productive activities the equivalent of several million full-time workers, at an economic cost of hundreds of billions of dollars. The key to easing tax biases is to lower tax rates at the margin on the activities being overtaxed. fee increases (higher taxes by another name, essentially) over the next five years. The Administration would also provide $33 billion of targeted tax cuts, mostly for politically favored groups and causes. This tax-and-spend budget strategy would squander the surpluses. What should be done is to use the funds to begin repairing some of the worst failings of the current tax system. The tax system is virulently biased against saving and investment. One source of Although the Clinton Administration projects enormous ..feder budget sphluses-$4.5 trillion ovler the next 15 year-s-it opploses utsing ev~en one cent of that fior a net tax cutt... [Its proposed budget actually seeks... $78 billion of tax increases and $26 billion of utser fiee incr-eases... over the next fivie year-s. the bias is a basic marginal tax rate Tax rates at the margin are what matter because they determine how strongly taxes push people to alter their behavior. People may choose to work a few more hours a week or weeks a year, or to retire sooner or later. They may choose to save and invest a bit more or a bit less. It is the tax on the incremental, marginal income that affects their decisions. Taxes at the margin can be brought down by lowering schedules. They can also be defect in the income tax: it taxes earnings used for consumption once but earnings that are saved twice. The tax system then aggravates the basic anti-saving Institute for Research on the Economics of Taxation reduced by correcting flaws in the tax code that raise effective marginal tax rates because they overstate income (by either undercounting legitimate IRET is anon-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to inorming the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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