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183 IRET Congressional Advisory 1 (2005)

handle is hein.taxfoundation/iretcgadv0180 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 that will promote growth and efficient operation of the market economy. January 19, 2005 Advisory No. 183 REFORMING TAXATION: ATTRIBUTES OF A GOOD TAX SYSTEM AND PRINCIPLES TO GUIDE REFORM* Since winning reelection, President Bush has reiterated his call for wide-ranging tax reform and simplification. He has appointed an advisory panel of economic and public policy experts to offer guidance to the Secretary of the Treasury. Treasury Secretary John Snow has been active in the tax reform arena, and served as a member of the National Commission on Economic Growth and Tax Reform. The possibility of real tax reform is higher now than at any time since 1986. The current tax system is a hybrid. It is basically a broad-based income tax, which imposes multiple layers of taxation on income used for saving and investment, but it contains provisions that treat some saving and investment as they would be treated under a saving-consumption neutral system (or consumption-based system). Economists generally acknowledge that a neutral tax system would result in a higher level of capital formation and per capita output and income than would the income tax, and would also be simpler than the income tax in a number of ways. The people and their political leaders are used to thinking in terms of the current tax system. Its definitions of income and its structure of taxes seem normal, even though they are often at odds with reality, logic, and sound economics. It would be * This paper has been prepared in conjunction with Innovation, Lewisville, Texas. tempting for the Commission to operate within the prevailing mind-set and merely tinker with the current system. This would not serve the country well. Rather, the Commission should use its position to improve the public's understanding of the nature of income, what constitutes a sound tax system in a democratic society, and the advantages of making significant changes. The Commission should begin by taking stock of the purposes and attributes of a good tax system, to give itself a standard against which to judge the many proposals it will consider. The Commission should charge itself with crafting a plan that improves the formulation of public policy by making the tax system more transparent to the voters and less susceptible to manipulation by special interests, either commercial or political. It should craft a plan that improves the functioning of the economy and the level of income. It should develop and explain its concept of the ideal tax base, and report what the economic consequences of that choice would be. In particular, the Commission should determine whether the reforms that it proposes would move in the direction of a more neutral tax base, with a lower cost of capital than the present system and the potential to increase capital formation, productivity, and per capita output and income. the IPI Center for Tax Analysis of the Institute for Policy g~*m S I 66~ 8 Agg

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