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277 IRET Congressional Advisory 1 (2011)

handle is hein.taxfoundation/iretcgadv0274 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. August 1, 2011 Advisory No. 277 SUPER-COMMITTEE SHOULD SHUN THE GANG OF SIX ON THE TAX ISSUE A budget deal has been reached. Growth of discretionary spending and Medicare would be cut relative to the rising baseline by a bit over $900 billion in the next ten years, and the current debt ceiling would be raised by $900 billion immediately. Spending caps would be imposed, and failure by Congress to act to implement the agreement would result in automatic across-the-board reductions. In a second step, a super-committee of twelve Members of the House and Senate would try to agree on a package of an additional $1.5 trillion in deficit reduction by late November, to accompany a similar rise in the debt limit. If they fail, the debt ceiling would rise by a slightly lower $1.2 trillion anyway, and additional automatic caps would kick in on discretionary outlays. The initial agreement contains no tax increases, a plus for the economy. It is based on the CBO baseline, which assumes the expiration of the Bush tax cuts, meaning that the super-committee cannot use the elimination of those cuts to reduce the need for further action on the deficit. However, all other types of tax increases would be up for consideration by the super-committee. That could be very bad for the economy if the super-committee botches the tax issue. What the Committee needs to know The super-committee must understand two things. First, government spending does not increase employment and output; it crowds out private sector output, usually with a decrease in value to the public, and creates dead-weight losses from the taxes imposed to fund the spending. Second, perfecting the income tax by broadening the base and lowering the rate would hurt, not help, the economy; we need a more fundamental shift to a different tax base. The current income tax system is heavily biased against saving and investment, and is seriously depressing output and income. Many Members of Congress and the Administration may be unaware of these biases, of the burden on the economy, and what sorts of changes would be beneficial as opposed to harmful. Some Members have studied the less- biased, more growth-friendly tax alternatives (such as the cash flow tax in the Report of the President's Panel on Tax Reform - the Bush panel - or the Flat Tax or USA Tax or Bradford X tax.) Most have not. If one is content with superficial solutions, it is very easy to lower tax rates. Here's the new IRS Form 1040: Line 1. Line 2. Line 3. Enter your income. Multiply line 1 by three. Pay tax at half the old tax rate. Presto! The tax rate is cut in half and the revenue jumps by half. What a deal! Of course, it is too good to be true. The tax rates on the actual income have gone up by half due to the mismeasurement of g~em I, 0 I gg~ g Agg

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