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180 IRET Congressional Advisory 1 (2004)

handle is hein.taxfoundation/iretcgadv0177 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. October 28, 2004 Advisory No. 180 A PRINCIPLED ANALYSIS OF PRESIDENT BUSH'S TAX PROPOSALS Introduction and Summary President Bush has proposed a tax and economic program of four main parts: permanent extension of the most recent tax cuts, enhancement of tax-friendly saving arrangements, enactment of fundamental tax reform, and fundamental reform of Social Security to permit personal accounts with real saving. The plan has two main objectives, the promotion of certain social goals and the promotion of long term growth. Some of the features of the original Bush tax reductions and their proposed extension address social issues, or were designed to spread the wealth of the tax cuts to people with limited tax liabilities, or to assist the unemployed. These provisions include making permanent the larger child credit, the marriage penalty relief, and the 10 percent tax bracket. These provisions are not focused primarily on expanding incentives to increase economic activity or jobs, although some married couples will find themselves in a lower tax bracket as a result of the policy change. Any pump-priming which old-style analysis might attribute to these provisions is a mirage. The major growth elements of the tax cut extension plan include making permanent the recently enacted cuts in marginal tax rates, the 15 percent tax rate caps on capital gains and dividends, and the repeal of the estate tax beyond 2010. These provisions have helped to produce the healthy 4% to 5% growth rates the economy has turned out over the last several quarters. Allowing these provisions to expire in 2010 would result in a significant tax increase and a significant reduction in incentives to work, save, and invest, and would slow economic growth. Making them permanent would reinforce the pro-growth impact they have had in recent quarters. They would be generally consistent with fundamental tax reform, which means reducing the biases against saving and investment found in the current broad- based income tax system. The Bush saving proposals move in the direction of eliminating the biases in the income tax against saving. They expand Roth IRA treatment of saving and broaden pension availability. The dividend and capital gains relief proposal reduces the double taxation of corporate income. The corporate income tax still needs to be phased out or fully integrated with personal taxes. The President proposes to move forward on fundamental tax reform and Social Security reform. Tax reform should be understood to mean eliminating tax biases against saving and investment, and keeping tax rates low to encourage effort. Social Security reform should mean the creation of personal accounts that would involve real saving, unlike the current tax-transfer system. If done correctly, these major reforms would boost employment, output and living standards by more than ten percent, or between $4,000 and $5,000 a year, for a middle income family. All these proposals and reforms would be easier to enact in the context of a net tax reduction. That g~.I 0 1 g6~ I ~ee

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