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198 IRET Congressional Advisory 1 (2006)

handle is hein.taxfoundation/iretcgadv0195 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. January 19, 2006 Advisory No. 198 ANALYSIS OF TAX REFORM PANEL PROPOSALS (PART 1) This is the first of a series of four papers that will examine the proposals of the President's Advisory Panel on Federal Tax Reform. The Panel's report is entitled Simple, Fair, and Pro-Growth: Proposals to Fix America's Tax System.1 The President charged the Panel with developing recommendations for an improved tax system that would increase the level of economic activity and incomes, be revenue neutral, be simpler than the current system, and be appropriately progressive. He also asked for at least one plan that resembled the current income tax, with incentives for home ownership and charitable contributions. The papers will explore how well the report's tax plans confonn to basic tax principles, and how well they would serve to promote a more robust economy and meet the President's other goals. The first paper will provide some background on the basic principles of taxation, and review how the current income tax retards economic growth by interfering with saving and investment decisions and creating other economic distortions. It will discuss how the Panel handled the question of what tax base, income or consumption, is better for growth, and how the Panel proposed to correct the distortions created by the current code. The second paper will discuss how the guidelines in the President's charge to the Panel limited the tax reform options available for consideration, how they affected the recommend- ations, and how they might have been handled differently. The third paper will look at some numerical estimates of the effects of the tax proposals on the cost of using physical capital, a good indication of the plans' impacts on capital formation and GDP. The fourth paper will discuss how the reform plans deal with international tax issues. Two basic concepts vital to understandins! taxation What is income? Income is correctly understood to be the earned reward for supplying labor and capital services to the market. Except in rare instances, income closely matches the value of the effort and services provided by individuals to produce additional output. Income is a net concept: revenues less the cost of generating those revenues. To obtain a realistic measure of a person's income, the full value of all costs of earning revenues (including education expenses, saving, and investment outlays and other business expenses) should be subtracted from revenues. Only that revenue that exceeds these costs should be taxable. Who pays taxes, and with what? In reality, only people pay taxes, and all taxes are paid out of income. Goods and services do not pay taxes; businesses do not pay taxes. Taxes collected by businesses fall on the income of the businesses' shareholders or other owners, lenders, workers, or customers in the form of lower returns, lower wages and/or higher prices. g~*m 6 I 86~ 6 ~.

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